Know your Investor personality type to avoid common investment mistakes. (2024)

It is commonly assumed that you are a rational investor. A rational investor is one that considers all available information in deciding on how they invest their finances. While this is acceptable in financial markets, there are limitations in reality that affect your ability to access and interpret all available information. You may be limited by resources such as money, time, knowledge and sometimes you may be influenced by your background, values, interests and generally your attitude towards life. Your background, attitude, interests, and values shape your investor personality type.

It is important to be aware of your investor personality type to help you make better investment decisions. There are different types of investor personalities. For our purpose we will look at two investor types: those that are actively involved in creating or growing their own wealth and those that passively accumulate their wealth. The two types of personalities determine how careful, confident, anxious and impulsive you are in making investment decisions and how you react to investment gains and losses. As an investor, you need to identify and be aware of your level of confidence, anxiety, impulsiveness, and carefulness as they relate to how they can affect your investment decision and consequently how you react to investment gains and losses. Depending on where you are on the continuum of confidence or anxiety and impulsiveness or carefulness you can be any of the following investor personality types.

1. Confident vs Impulsive: You are confident and believe in your own intuition and abilities. You are reluctant to take investment advice and act on impulse based on intuition and you tend to have portfolios that are concentrated in fewer assets. You may find yourself using holding on to assets that you are familiar with or taking bets in your investment decisions. While this may work for you, it is important to consider your goals, obligations, personal circ*mstances and to always seek investment advice when making investment decisions.
2. Confident vs Careful: You are aware of your limitations, and you seek and take investment advice. You make independent decisions after getting and rationally processing the information. Your ability to process the information is earned through knowledge and you prioritize learning. It is important to know that personal financial mistakes can be made worse by ignorance, bad habits and bad financial advice. Invest in some financial knowledge by reading books, avoiding bad habits by reacting to impulse and convenience and ensure that the features of the products you buy are necessary. It is also important to ensure that you are getting financial advice from qualified personnel and institutions.
3. Careful vs Anxious: You are careful and anxious about the future. You are more concerned about protecting your assets more than you are concerned about growing your assets. You may seek financial advice but from people you perceive as being more knowledgeable than yourself. You have a preference to fixed income like assets and avoid loss and regret. It is important to know that you cannot completely avoid loss in investment, and you may win and lose some. You need to be aware that the amount of risk you are willing to take will affect the type of investment assets you choose and the return that you get from the investment. Some risks can be reduced by taking insurance or diversifying your portfolio in different investment assets while others cannot be reduced or mitigated. Make it a point to always inquire about risks and how your preference for risk will affect your choice of investment assets and return whenever you discuss investment options with your financial advisor.
4. Impulsive vs Anxious: You have some idea about what you want to achieve but you are also aware of your limitations. You are willing to take investment advice from experts but often biased towards what is trendy. You care a lot about what other people see of you and this makes you susceptible to investments that promise unrealistic returns. You may also find yourself withdrawing from one investment to another prematurely. Ensure that you scrutinize investments before taking action to invest and always take time to check the legitimacy of the institutions and credibility of financial advisors before taking the decision to invest.

The investment decisions you make may change based on your age, stage in life or unforeseen circ*mstances. You are not expected to fall directly in any of the investor personality types. It is common to identify yourself with multiple investor personality types. As investment experts, Prudential will help you make the right investment decisions.

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