Analysis done by Merrill Lynch Investment Managers and Mathew Greenwald indicated distinct investing personalities.
“Our data analysis reveals four distinct investor personalities,” said Greenwald’s Perlman. “Each personality has a profound effect on the kind and frequency of mistakes an investor makes.”
The investor personality types identified by the research are:
1. Measured2. Reluctant3. Competitive
Of the 1,000 investors surveyed, 32 percent were identified as measured, 26 percent as reluctant, 17 percent as competitive and 11 percent as unprepared; 14 percent did not clearly fall into a category. Profiles of the four types follow.
Measured investors (32 percent): Secure in their financial situation and confident they will have a comfortable retirement, they’ve achieved their success because they started investing early in life and invest and re-balance regularly. As a rule, these investors do not try to beat the market or over-allocate to a single investment. Measured investors are the least likely to say they waited too long to start investing or have not invested enough. They are also least likely to be plagued by the emotions that commonly cause investment mistakes: fear (14 percent) and anxiety (13 percent).
Mistakes made: Even the most methodical and even-keeled investors make mistakes. Measured investors’ dedication to their investments often makes it difficult for them to let go of losing investments. This was the most common mistake cited by measured investors (41 percent) and nearly one-third of them cited this as the most painful mistake they’d ever made.
Reluctant investors (26 percent): These investors do not particularly enjoy investing, preferring to spend as little time as possible managing their investments (92 percent stated this, versus just 27 percent of the measured investors and 35 percent of the competitive investors). Still, reluctant investors say they are happy in their current situation and believe they will have a secure retirement. Reluctant investors have some notable strengths. Only 32 percent of them said they have held losing investments too long and only 25 percent of them said they have over-allocated into one investment. Not surprisingly, reluctant investors are the most likely to have a financial advisor at 63 percent.
Mistakes made: Seventy percent of reluctant investors said they waited too long to start investing and 41 percent of them identified this as their most painful mistake.
Competitive investors (17 percent): Competitive investors enjoy investing, try to beat the stock market, and say they are both happy with their current financial situation and confident in the future. After measured investors, competitive investors are the most likely to have started investing early, to put enough money into their investments, and to invest regularly. This group likes to invest as much as possible and regularly re-balances (only 12 percent have gone more than 18 months without re-balancing). Overall, competitive investors demonstrate high knowledge levels when it comes to investing.
Mistakes made: Forty-six percent of competitive investors have a hard time letting go of losing investments. Thirty-nine percent said they had put too much of their portfolio to one stock or investment. Not surprisingly, competitive investors also tend to chase hot stocks. Competitive investors are most likely to be overconfident (39 percent) and greedy (34 percent), but they are least likely to feel apathy (18 percent) when it comes to investing.
Unprepared investors (11 percent): Unprepared investors are not happy with their current financial situation. They are the most likely to lack confidence (47 percent) and be fearful (41 percent) or anxious (36 percent) about investing. In general, they have lower knowledge levels on financial topics and express the deepest regret about not investing sooner (57 percent see this as a major regret). They do not feel they will have a secure retirement—with reason.
Mistakes made: Unprepared investors are the most likely to say they waited too long to start investing (75 percent)—which they most commonly cite as their most painful mistake—and they are the most likely to say they have not put enough money into their investments (60 percent). They are very likely to hold on to losing investments too long (56 percent), allocate too much of their portfolio to one stock (45 percent) or chase a “hot stock.” They are the least likely to rebalance their portfolios. While a smaller group among the relatively affluent sample in this survey, they may well be a much larger proportion of the general population.