We are not all born with the same skills. Knowing yourself, knowing your weaknesses and strengths is a considerable asset for successful investments in the stock market and in selecting the best stocks. This will allow you to adapt your way of investing and to try to fight certain aspects of your personality that could cost you dearly.
WHY KNOW YOUR INVESTOR PROFILE?
Defining your investor profile and knowing the different investment strategies is essential before starting on the stock market. We identify 3 distinct types of investors. Each brings its characteristics and above all, its results very different from each other.
The first investor is emotional, he lets his moods dictate his buying and selling, some believing he has the right instinct. The second believes or has been persuaded, that the best possible performance is an average performance. For these investors, the long-term results will depend heavily on their management of the downward phases of the markets.
Finally, the third is aware that his emotions lead him to make the wrong decisions and builds a structured and almost automatic approach to his financial investments. Knowing your investor profile is above all avoiding the setbacks of an approach to the financial investment that is not suited to your personality. Therefore, it is to avoid financial losses. This approach may seem unnecessary, futile, but it essentially aims to redirect towards the more responsible investment of its finances and re-evaluated earnings expectations.
- I BUY EXPENSIVE, AND I SELL ON SALE
This is, and you will understand, the ideal type of investment to squander a securities account. It is very common. This investor is above all a follower and decides to buy shares when everyone else buys them, carried away by the euphoria of the prices which have risen very high. Then he sells when prices have fallen, during a stock market crash, overcome by panic and the fear of losing more. The Zoom stock has followed this trend, registering an high volatility during 2020.
Evolution curve of a stock market cycle showing the different psychological states of an investor according to the phase of the economic cycle. For those of you who are looking to know how to invest in the stock market, there is a good chance that you have experienced this or that it will happen in the future. This is definitely not what you want!
This behaviour is human nature, we like our decisions to be validated by the actions of others. These investors listen to and read the “trade” media and let their emotions lead them to make bad decisions.
The results are therefore logically lower than average – and in worst catastrophic cases – because these investors tend to buy more than average and sell for less than average. In other words, they buy high and sell low. Often, they end up disillusioned, even bitter, believing the market is rigged.
This often ends with an abandonment of the investment in the stock market with sometimes heavy losses.
- THE INDICIAL OR PASSIVE INVESTOR
It is the type of investment most commonly applied today by professionals. It is gaining popularity in Europe but is already very widespread across the Atlantic.
The index investor places his money in funds – or trackers (ETFs). They obtain average to high performance depending on the share of risky assets allocated. They have the advantage of requiring neither time nor very advanced knowledge. Index management offers access to all asset classes, it is powerful because it allows you to measure the risk taken.
It is now spreading more and more through management under a mandate which makes it possible to trust the arbitration decisions of the expert, against remuneration. The management under mandate remains a mutualized solution, it amounts to investing in an investment fund because the arbitration decisions are common. The index methods are fully recommended, in the long term, the risk of loss seems very minimal.
- THE METHODICAL AND ACTIVE INVESTOR
They are experienced investors with acquired knowledge. They will develop several “styles” of investing naturally. It depends on their personality and the investment methods they are comfortable with or not.
Whether they actively practice ETF index management, the fundamental analysis of companies for the constitution of a stock portfolio, or the technical analysis of prices, they are distinguished by their method, their patience and their know-how. The investment rules are known and acquired to them.
There are many variations but the common point is a structure, a clearly defined investment mechanism that allows investors not to be driven by their emotions. It requires hard work of research, analysis and discipline.
WHAT TYPE OF INVESTOR ARE YOU?
We should all be able to make this choice consciously. Some of you recognized yourself in the first profile, having experienced stressful times during a stock market crash.
One thing is certain that no one wants to be this type of investor. Others have taken refuge in the second type, and we think it is an excellent choice as long as you do not let yourself be guided by your emotions during the turbulence in the markets. If you are the third type then congratulations.
Being a good investor requires acting with full awareness of your abilities and knowledge. Approaching the markets as one approaches a casino or a lottery is a costly mistake, but it is the most common “investor” profile.
Above all, you will need to be trained and have expectations that correlate with your experience and the knowledge acquired over time.