Which Investor Class do you belong?

Have not been through such a terrible atmosphere any time before where health and wealth both are at stake. Though this is not an end of the world but most certainly it gives us a realization of an emotion called FEAR ! 

Sometimes it is a very helpful thing that keeps us from harm. But many times it’s an inner voice and barrier that keeps us stuck. When such fear takes a form of Envy or when it becomes Fear of Missing out (FOMO), a bias emerges inherently and gives birth to a new emotion. Such an emotion is called GREED.

Greed and fear are most common behavioral bias in human which are cyclical in nature. If you try and observe the pattern of both these biases, you would understand that greed follows fear and vice versa.

But Wait! Why are we indulging ourselves in such greed & fear philosophy?

Because, in this cycle of two emotions, there lies an opportunity. 

When the cycle is at or near to extreme fear, it gives an opportunity to those who want to ride the next cycle of greed and when the situation reaches to extreme greed, it gives an opportunity to be cautious or careful from another cycle of fear.

This thought brings me to an important aspect of investing i.e. “Investment Behavior”.  

While making a decision or a plan for investment, we often look at several factors like risk, return, volatility, market cycle etc. that can have an impact on our money. It is indeed important to know about these factors to make an informed decision BUT the most overlooked factor is our own behavior towards investing. We often tell this to our clients that investment is subject to behavior risk, please understand all your emotions carefully before & while investing.

Understanding our behavior not just helps us in making reasonably good decisions but also helps us in identifying the class of investor that we belong to. Based on our practice and understanding of investors’ sentiments till date, we have construed that broadly there are five different class of investors: Passive Investor, Passive Investor with indulgence of some Activism, Strategic Investor, Tactical Investor and Vulnerable Investor.

So, how can we define these Investor Classifications? Let’s try and understand each of them with an example:

PASSIVE INVESTOR

One who simply stick to a discipline of regular savings in market and not concerned about any additional investment activity during market volatility. This type of investor is not bothered about any kind of activism with investing. 

Example:

Mr. A invests in equity market simply through monthly SIP of Rs. 10000 with a purpose of long term wealth creation. He does not want to do any active investing even in times when market falls 20%/30% but he continues with his regular SIPs.

PASSIVE INVESTOR WITH INDULGENCE OF SOME ACTIVISM

An investor who is passive by nature but he/she would like to invest more money when market falls substantially so that he or she can have a visible averaging benefit over long run. Note that such type of investor engage themselves in such active investing only when markets are irrational.

Example:

Mr. B invests in equity market through monthly SIP of Rs. 10000 with a purpose of long term wealth creation. He would like to invest more money when market falls 20%-30% along with his regular savings.

STRATEGIC INVESTOR

An investor who strictly follows a broad asset allocation based strategy for his investment plan. He would devise his asset allocation in a way that would consider his risk appetite and investment horizon.

Example:

Mr. C plans to invest with an asset allocation of 25:75 - Debt to Equity ratio with a long term wealth creation goal. When the time is nearer to targeted goal, he would revise his strategy to 75:25 - Debt to Equity Ratio in order to protect his accumulated corpus.

TACTICAL INVESTOR

An investor who is very active & aggressive by nature and invests his/her money based on market trends/cycles into various asset class ranging from equities to debt and even in commodities & currencies.

Example:

Mr. D invests his 100% investible money into equity when market is at lower valuations and switch to debt when market becomes richly valued. Again when equity becomes relatively cheaper, he switches back to equity

VULNERABLE INVESTOR

A sensitive and unsophisticated investor who is sensitive to behavioral bias is called vulnerable investor. They end up making investment decisions based on their convenience.

Example:

Mr. E invests with 100% equity allocation distributed equally into 5 equity funds. Later he finds that 2 out of 5 funds are not performing temporarily and he is not patient enough to stay put and switches his money from non performing funds to other 3 performing funds. Later if he finds something more lucrative then he would wish to shift to that option.

Risk, returns and goals

Having identified yourself as the type of investor is essential before selecting the instrument you will be investing in to meet your goal. An equity investment might require lesser capital and lesser time to reach your goal, but it might not be the best thing for you. One might be tempted to classify himself or herself as an aggressive investor when the difference in returns for the same capital is theoretically calculated for various asset class.

Thus identification of type of investor you are should be sunk in before you move to select instruments to achieve your goal. Not all the time it is possible to identify yourself before selection of instruments but atleast you should develop your  understanding in the initial phase of your investment journey and take right steps in right direction.

So, taking aforesaid classification into consideration, Which Investor Class do you belong?


Thank you for reading !