My previous post defined investing. The purpose of this post is to help you figure out your investor type.
Finding out what type of investor you want to be, is the single most important step you have to take when becoming an investor. Sadly, most people never even consider investor type. The result is that after investing for some period of time, they realize that they have been using an investment style that never suited their investor type. This mismatch can lead to losses, underperformance or other investing failures.
There are many different ways that you can segment investing. You can segment investing into investor types, investing styles, investment vehicles, investment accounts, and types of investments. Today we’re going to discuss the three key types of investors. These investor types are specifically tailored for those who want to learn to invest on their own.
The three types of investors are:
- Passive Investor
- Active Investor
- DIY Investor
It is important to stop for a second and address a possible point of confusion. You may have heard of “passive investing” or “active investing” before. That is NOT what I am discussing here. We aren’t talking about what types of investments you are making, but the type of investor.
The defining characteristic of a passive investor is someone who wants to invest money with the smallest use of their time as possible.
If most of the following describe you, then you are probably best suited as a passive investor:
- You dislike managing your money, finances, or investments.
- You are highly time constrained.
- You are new to the topics of business, economics, or finance, and are not interested in becoming an expert in them.
- You want a simple and easy answer for how to invest.
- You dislike reading about stocks, companies, or books on investing topics.
- You want to invest without it distracting you from the other priorities in your life.
- You are content to receive average market returns with a safe investment strategy as long as you have the peace of mind that your investments are taken care.
One of the goals of this blog is to provide passive investors with an easy method to learn how to invest. I hope to provide you with a guided simple format to begin investing. I will provide straight-forward steps for passive investors to take so that they don’t have to worry about their investments again. There will be a separate blog feed and guides for passive investors as well as recommended resources.
The defining characteristic of an active investor is someone who wants to achieve the optimal balance between their investment of time in exchange for improved returns on their investments or reduction in the risk of their investments.
If most of the following describe you, then you are probably best suited as an active investor:
- You are interested in managing your money, finances, or investments without it interfering with your life.
- You may be time constrained, but are willing to dedicate an hour or two per month to ensure your investments are properly managed.
- You have a basic understanding of math, and are willing to use calculators or computer programs to monitor your investments.
- You are somewhat knowledgeable of business, economics, or finance and are interested in learning more.
- You don’t mind reading a small amount about investing on a regular basis.
- Proper management of your finances/investments is a priority for you.
- You’d like to achieve either above-average investment returns OR below-average risk.
Most people will either be passive investors or active investors. While a passive investor will implement the simple strategies in order to minimize time investment, an active investor is willing to dedicate small amounts of time to both monitor their investments and make adjustments based upon a preplanned set of criteria. This allows for slightly more complex strategies which can offer distinct benefits based upon what the investor is seeking. I’ll cover these strategies and the background information needed to be an active investor and resources to help you be successful.
The defining characteristic of a DIY Investor is someone who wants to do everything they can to maximize their returns while minimizing their risk. A DIY Investor is willing to commit extra time learning about investing and selecting the best investments in order to achieve this above average result.
If most of the following describe you, then you are probably best suited as a DIY investor:
- You enjoy the details of managing your money, finances, and investments.
- You are willing to treat investing like a part-time job; sometimes spending two, five, or ten hours+ a week reading and researching investment opportunities.
- You are skilled in the use of spreadsheets, and knowledgeable in math. These skills aid in understanding company performance.
- You either understand business, economics, and finance topics or are willing and ready to learn the basic and complex aspects of these topics.
- You enjoy reading and are willing to spend most of your investment time reading. Sometimes this reading will be what many consider “boring” company annual reports, or similar filings.
- You’d like to do what you can to achieve above-average returns on your investments. In addition, you want to keep your risk of loss or under performance at an absolute minimum.
I personally classify myself as a DIY Investor. There are many articles targeted at passive and active investors, but there are very few comprehensive resources to help a DIY Investor be successful. One central goal of this blog is to provide that comprehensive source for those who wish to become DIY Investors. Here is the blog feed and guides for DIY investors and their recommend resources.
Each investor type has it’s own merits and drawbacks. There is probably a single investor type for which you are best suited. Only once you’ve decided upon what type of investor you want to be, can you truly start to be successful investing. This is one reason why it is impossible to give investment or financial advice which is universally applicable. Different types of investors need different investments, different advice, and different background knowledge. A passive investor may be content with the basic knowledge needed to understand an index fund and a simple set of steps to automate their investing. However, a DIY investor needs to learn the complex investing and finance theories behind the operation of the stock market.
If you found this information useful and know any friends who are investing or are interested in learning how to invest, consider sharing or liking this post on Facebook, or other social media. You can find the social media buttons just below the article. Or email your friends a link to the page, so they too can find out what investor type best suits them.
What’s your investor type? Comment below and share why you chose that type.