3 Types of Investors – Which Type Are You?

3 Types of Investors

I see 3 main types of investors today; each with their own characteristics and results. One lets their emotions cause them to make really bad decisions; usually these people eventually quit.  The second voluntarily decides the best they can achieve is average performance, and the result is good results in bull markets and poor results in bear markets. The third attempts to control their emotions and increase allocations when asset valuations are bargains and decrease allocations when asset valuations are high.

Here are the 3 types of investors:

The Buy High Sell Low Investor

This is the average investor who listens to the media, culture, and lets their emotions cause them to make bad decisions. Most investors find themselves buying when everyone else is buying and selling when everyone else is selling.  This means they far underperform the market averages because they buy high and sell low. Often these people become disillusioned, and some even bitter, believing the market is rigged when it was actually their own doing.  Most often these people either quit or eventually lose much of their money.

The Index Investor – Passive Management

This is the most popular and universally accepted type of investing strategy. The Index Investor believes he can passively invest money in funds that follow indexes and receive a “fair” rate of return.  This type of investing became very popular in the long bull market from 1980 – 2000. Index investing does very well in bull markets and very poorly in bear markets. I call this “lazy investing” although most investors have truly been misled that this is the best way to invest. Passive Management produces average rates of return less expenses and fees.

Index investing is best for investors who lack the time, knowledge, or desire to invest time and effort into individual investment opportunities. There is nothing wrong with this choice, but it is a choice.

The Value Investor

The Value Investor attempts to buy investments that have a low valuation compared to the potential rewards of, and risk taken, by owning the particular investment. This requires hard work, research, and an ability to not let the culture tell you what to do. Therefore it is hard.

The fact is most bear markets are preceded by excessive valuations. That is why investors need to have a flexible asset allocation that allows them to change their allocations of overvalued assets and move them to assets that are not overvalued. Since correlations among assets are becoming more and more positive, this may mean moving to cash.

I use a tactical asset allocation strategy which increases allocations to assets that are bargains and decreases allocations to assets that are expensive. Yes, being a value investor is more work. Nothing good comes easy. The payoff can be substantial because this strategy can increase returns and lower overall portfolio volatility at the same time.

What type of investor are you?  Would you consider changing?