3 Types of Investors – Which Are You?

I see three main types of investors today; each with their own characteristics and results. The first lets their emotions cause them to make really bad investment decisions; usually these people eventually quit. The second voluntarily decides the best they can achieve is average performance, with the result being good results in bull markets and poor results in bear markets.

The third type of investors attempt to control their emotions and increase allocations when asset valuations are bargains and decrease allocations when asset valuations are high.

Let’s look at the 3 types of investors:

The Buy High, Sell Low Investor

Many investors find themselves buying when everyone else is buying and selling when everyone else is selling. It’s imbedded in our culture; including momentum investing. It’s embedded in our DNA; we like to be validated by other people’s actions. This is represented by the investor who listens to the media, culture, and lets their emotions cause them to make bad decisions.

This result is these investors far underperform the market averages because they buy at above average prices and sell at below average prices. In other words 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.

Passive Investor

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 indices and receive a “fair” or average rate of return.

Index investing became very popular in the long bull market from 1980 – 2000. Its current acceptance has become a cult-like strategy that draws criticism to its critics and contempt towards those who speak out against this favored investing strategy.