What Type of Investor Are You? – A Quick Self-Awareness Guide
Even though no two investors are exactly alike, there are patterns to investors, and generally speaking, they fall into two types:
- The Passive investor
- The Active investor
Knowing which type resonates best with you can help align your investing to your personality and lifestyle preferences. Having this self-awareness is key when it comes to achieving your desired outcome. To help you figure out the best path and to understand the differences, let’s dive into these two investor profiles.
The Passive Investor
This is the most common type of investor, although, I’ve noticed over the past few years, there are not a lot of educational resources to help clarify the passive side of real estate investing. That is why the Best Ever Team and I have recently doubled down on creating free resources for passive investors. Learn more here.
Common Traits of a Passive Investor Often Include:
- Lacks the time to frequently monitor investments
- Enjoys reading financial news
- Likes to own a little bit of a lot (values diversification)
- Seeks to match, not beat, the market
This type of investor is often unemotional about the investing process while being more “active” on the portfolio management side rather than on the investment itself. Passive investors have an understanding of multiple types of investments, as well as the overall associated risks.
Portfolio Investments May Include:
- Real estate syndications
- Private placement offerings
- Notes or hard-money loans
- Tax liens
- REITs (Real Estate Investment Trusts)
- Stocks, ETFs and other publicly traded assets
Generally speaking, this type of investor is proactive when selecting investments, and then tends to sit back and enjoy the ride. The philosophy? Primarily long-term buy and hold, hands-off investments.
The Active Investor
In contrast to the passive investor, an active investor may also enjoy reading financial news; however, they often spend several hours each week or month actively monitoring and managing their investments.
This person may seek to have involvement in a number of areas in the investing process. An active real estate investor could be similarly compared to an active day trader who follows the stock market, even if they don’t execute dozens of trades each month.
This kind of investor usually prefers a more hands-on approach to their investing. An active investor is often more interested in the “business” of a particular investment or industry.
Common Traits of an Active Investor Often Include:
• Likes to create their own unique strategy or business plan
• Doesn’t necessarily value diversification as a top priority
• Seeks control over his or her investments
• May have a unique skill or upper hand compared to competitors
• Seeks to beat the market
Generally speaking, this type of investor is actively involved when selecting and underwriting investments. The philosophy? Short-term and long-term, “do-it-yourself” approach.
More About Your Personality
Consider how you respond to financial transactions, emotionally. This can help you invest in a way that’s aligned with your comfort zone. For example, if you’re investing and you sometimes feel nervous about making a mistake, this is a sign to be aware of, especially if it causes you to buy or sell on a knee-jerk reaction. As another example, if you tend to develop an emotional attachment to a certain stock or piece of real estate, this may cause you to hold onto the investment longer than you should, in hopes that it will rebound; this can hurt your investment portfolio returns.
If these two examples describe your personality type, you may decide that a passive investing approach is more suitable. No matter what investing decisions you make, there can be real value in having insight into your investing personality, which ultimately allows you to feel more comfortable with the investing process. The sooner you identify what suits you best, the better off you will be in the long-term.
Emotions connected to money and finance can be traced back as far back as your childhood. For example, if your parents were anxious about how to invest; you may have picked up that habit yourself. It is helpful to be aware of these emotion-based patterns and break them as soon as possible, so they do not hinder your financial future.
Understanding Your Risk Tolerance
How Do You Handle Risk? There Are Four Common Personalities When it Comes to Risk:
If you are cautious, you may be extra sensitive to losses in your portfolio, and you may feel more comfortable with safer or more conservative types of investments. Fear is usually playing the primary role with this personality type.
If you are systematic, you likely make investment decisions based on hard facts and data. Details and analysis matter and this personality type will often refer to research to make a decision. This personality type can also have a lower risk tolerance but will rely on “the facts” to make a decision.
A spontaneous investor often has a higher risk tolerance as does the individualist. If you’re spontaneous, you may quickly switch from one investment or strategy to another. Perhaps on advice or knowledge, you’ve recently received, or because of a new developing trend. This personality type finds satisfaction from frequent change and new investing ideas.
Individualists, typically seek unbiased research and due diligence to make decisions independently. They are often willing to take calculated risks because they are confident in their research. New trends and media hype often do not persuade an individualist.
No matter what personality type you have or what your risk tolerance is, self-awareness is a key ingredient to a successful investment strategy. Whether active or passive, investing is not a short-term endeavor, so it is beneficial to take a little time to reflect on your goals, your strengths, and the lifestyle you desire.
Step one is to simply get started on your own self-awareness
To Your Success