Psychology of Investing: Four Common Traits
From foreign exchange to stocks, bitcoin, and meme stocks, financial markets are riddled with many people hoping to make more money than they put in. While these markets have their highs and lows, and movements can mostly be unpredictable, we have seen several types of investors with their strategies making gainful trades and cashing in on market cycles.
Investors can be grouped into four categories based on their behaviour. These are preservers, followers, independents, and accumulators. While each of them has distinct characteristics, aversion to risks, and confidence levels, it is very important to understand them so that you can identify which one you are, and relate to each group in a tailor-made manner. Let’s take a look.
Psychology of investing: Preservers
The initial goal of investments is for the long-term growth of capital. Preservers uphold that meaning. They are more concerned with capital security and compounding, so they are hardly moved by news and noise. Amongst the four groups, they are the most rational. They believe "less is more", so they don't make decisions to tamper with their investment returns. Although, When their investment returns start dwindling, they tend to be more emotional than rational. Most preservers are older people that have, through blood and sweat, made a name for themselves in different fields of work. This is understandable because the older we get, the more concerned we are about cash flow and the freedom of capital security.
Psychology of investing: Followers
Some investors-- probably by choice, have a knowledge gap, or lack of interest in taking the lead for their investments. So they choose to follow another person's investment choices or follow trends. Unlike preservers, followers have little regard for long-term investment when choosing their investments. Their greatest undoing is usually that they don't know when to buy or sell, and one lucky moment makes them feel they are professionals. Followers yield more to reports, news, and people's opinions in books or social media, and most of them do well with having a financial advisor. Because followers are more emotional investors, they tend to overestimate their risk tolerance and jump into "hot takes" by media or friend's recommendations.
Psychology of investing: Independents
This group of investors has unconventional ideas about investment. They spend so much time researching and learning about investments that financial advisors may have a hard time working with them. Not because they don't use the advice of financial advisors but mostly because an opinion contrary to theirs might be met with stiff resistance. They're the most active group in the financial market, and they are not core believers of long-term investing. Independents are impulsive investors, and they tend to fall into mistakes because of half-baked knowledge. They have the highest risk tolerance, and they are very profit-oriented. A very positive side to Independents is that they are analytical, understand financial terms, and often prepare for volatility in their investment decisions.
Psychology of investing: Accumulators
Accumulators tend to be carved out from a bit of the other three groups, and still, they are unique. They value compounding, dollar cost averaging, and capital preservation like the preservers; they are knowledgeable and very risk-tolerant like the independents and they have a very strong liking to trends like the followers. Accumulators are very calculative. They have a strong picture of the returns they want and won't mind changing plans repeatedly to achieve that goal. Most accumulators are entrepreneurial in nature, and if left unadvised, they will make many trades which will, in turn, affect the overall returns they get. Like the Independents, they have unconventional investment mindsets, making it difficult for them to be advised. Asset allocation, diversification, and stop losses are a few pieces of advice often shun by accumulators. Have you seen anyone who is so confident in his investment strategy and refuses to take the blame when things go south? You might be looking at an accumulator.
As you have discovered, we have millions of people in markets with different traits and goals. Knowing the various aspects of the psychology of investing makes you understand, interact with, and counsel (or take counsel from) individuals in the proper way.
Regardless of where you fall in the spectrum, it is crucial to remember the first rule of investing: do not invest more than you can afford to lose.
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