Saga of Financial Markets


Last updateSat, 29 Jul 2017 12am

Back You are here: Home Market Market Update Insight What kind of Investor are you?

What kind of Investor are you?

Retail investors normally perform worst than the professionals.  One of the reasons is because retail investors are quick to buy after time have been good, and equally fast in bailing out at the first sign of trouble.  As a result, retail investors rarely do well because they buy at highs and sell at lows.  Thus it is good to know what kind of investors you are.

In general, there are four type of investors:

  1. Buy and hold investors | Buy-and-hold investors need diversified portfolios that adhere to their strategy. A gentle market decline should have these investors thinking about purchases — because regular investments in all conditions help them to dollar-cost average their way to profits — though they should at least be dedicated to holding in virtually any condition short of Armageddon.  The problem for buy-and-holders is that when the market gets frightening, they try to make tactical, strategic trades based more on emotion rather than their actual game plan. It might feel good to make those moves, but historically it turns out poorly over time.
  2. Tactical Investors | The tactical investor, meanwhile, wants to make sure any decisions are well-planned. Different strategies call for unique tactics; there are strategic investors saying the current market troubles are putting both the domestic and emerging markets on sale, while others say those trouble spots have a ways to go before they bottom.  But saying you’re opportunistic and value-minded doesn’t mean you can rush into the market territories where it’s easiest to get burned right now. Tactical investors must be so convinced they will be right that they can sit through a period when it looks like they’re wrong (while maintaining an exit strategy in case they are mistaken).
  3. Asset Allocators | Asset allocators should look to rebalance now. The market moving a few percentage points has taken portfolios off of planned allotments, and rebalancing resets holdings back to target levels by culling winners and reinvesting the proceeds into the laggards.  At a point when it looks like the hot part of the investing world is ready for a breather, rebalancing locks in gains, while redeploying the assets into areas that you can “buy low.”  That said, if you’re changing your allocation to pursue what’s hot now or to avoid what’s cold, you’re simply chasing returns, a story that usually ends badly.
  4. Opportunists | Opportunists hear that any decline is the chance they have been waiting for to buy. If you can’t feel good making those moves and buying into what has fallen, you’re talking a better game than you play.  There’s always opportunity in the markets, but the current volatility should give you an idea of what you want to pursue if the market makes even bigger moves in the coming weeks and months.

Reference, Chuck Jafee, 2015-08-23, "Markets' Selloff Reveals how you'll React if Stocks Fall Further"