Money Management: Understand investor personalities and work with them

The stock market continues to reach new highs (second-longest bull market in history) and investors have different perspectives on future strategies. At times they are either overly concerned or optimistic — both of which can lead to imprudent investment decision making. Investors have personalities/behaviors and a good money manager understands each client’s personality type and assists them in structuring portfolios that not only help meet their goals, but to get there safely.

Here are some typical behaviors as outlined by the CFA Institute:

Preservers place a high value on overall financial security and preserving wealth rather than seeking growth. These investors are careful and deliberate and often have difficulty taking action with their investments. They tend to be focused on short-term performance, particularly in down markets, and losses experienced. Their tendency is to have lower than average risk tolerance.

Followers are passive and lack interest in and/or have little aptitude for investing. They tend to follow leads from friends, family, colleagues and current fads to make their decisions. Often followers do not have a long-term plan. They can trick themselves into thinking they are smart when a decision works out — this can lead to unnecessary risk-taking behavior. Their regret over not participating in the latest fad leads to investing at the wrong time … when valuations are high. They are passive investors with low risk tolerance … although they think their risk tolerance is higher than it actually is.

Independents have ideas about investing and like to be hands-on in the investment process. As an interested investor they are quite engaged, and often have unconventional mindsets. They are analytical and make decisions based on their own logic and instinct and are willing to take risks and act decisively and many have long-term investment goals. Independents are considered active investors.

Accumulators are focused on wealth accumulation and are confident in their ability to do so. Many have been successful in a business venture and translate that confidence into successful investing. Tending to not follow a structured plan, they often like to adjust their portfolio allocations and holdings based on market conditions. Rather than making a plan without much data, they often dig deep into details. Accumulators are active investors, risk takers and are in the game to win.

Based on the above, investors often have emotional reactions to the market moves. These can range from being too conservative and not meeting your goals to being too aggressive such that you are exposing your assets to more risk than necessary. A good money manager spends significant time getting to know clients, their risk tolerances and charting a course that is appropriate for each. When clients have appropriate asset allocations (the percent of stocks to bonds), they will be able to comfortably weather market cycles. Competent managers will properly rebalance portfolios and manage the risk.

Don’t let your “investing personality” impair your long-term goals. Seek professional assistance and be sure to ask that manager if he or she is specifically acting in your best interests.

Marijoyce Ryan, CPP, is Vice President of Fiduciary Services for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534 (585-586-4680).