Psychological profiles of stock investors: how it works

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Despite the fact that when investing, it is necessary to conduct a fundamental analysis and take into account a large number of indicators, we must not forget about the human factor. Psychology and psychological patterns play a key role in investing. But many investors do not think about it.

According to experts, investors have a diverse emotional palette, on the basis of which they make decisions. Emotions or impulses can significantly affect the results of investing. Psychological profiles of investors determine how they will work with the portfolio, because all their decisions are directly related to emotions.

The role of emotions in investing

A smart investor is someone who controls their emotions. In his book The Intelligent Investor, Benjamin Graham defined reasonable investment as “a type of applied emotional intelligence, which is more a character trait than a mindset.”

People come into investing, having behind them life experience, psychological patterns, habits and inclinations. Some call it “baggage”, but the word “cargo” is much more accurate.

The best investors are usually calm and patient. They are able to set strategic goals and adjust them as necessary. They never panic. They probably also have good self-esteem and learn from their mistakes.

Psychological qualities that harm investment

Consider the main psychological qualities that can provoke unsuccessful investment results:

  • Self confidence. This is an exaggerated belief in one’s abilities in comparison with a real situation. In investing, self-confidence can lead to over-purchasing of securities and assets. The investor “substitutes” for this with his sense of confidence in factual knowledge, which leads to errors, additional fees and other costs.
  • Complacency. Smug investors attribute positive, successful investment results to themselves, and bad ones to external factors. Being smug is comfortable emotionally. But over time, this brings financial harm.
  • Selective memory preserves some memories and forces others out of consciousness. This can encourage investors to remember good decisions and forget bad ones. Selective memory distorts internal analysis and encourages self-confidence.
  • Self-justification. This is about investors who are looking for excuses, something is going wrong. Example: “Shares gave little dividends. I must have not analyzed them enough before investing. ”
  • Herd instinct. This leads to mediocre results when buying stocks, which depend on the majority opinion. Herdness leads to the fact that the investor misses excellent financial opportunities.

All these forms of behavior are a natural expression of human psychology. Any of them can destroy the most successful investment strategy and practice. Combined with each other, they limit dividends and result in losses. Moreover, an investor relying on one or more of these habits is likely to root them and thereby continue to act to the detriment of himself.

Key psychological profiles of investors

Each investor has different emotional inclinations, investment strategies and needs. This psychological relationship is rarely considered when it comes to investing. However, it is believed that the investor should choose a strategy not only based on their financial capabilities. The strategy should exactly “fit” the personality of the investor.

Here are some examples of investor profiles:

Aggressive investor

This investor wants results and immediately because he is impatient. He probably has a tendency toward the patterns of behavior described above. Long-term strategies are not for him.

Aggressive investor takes risks if the transaction does not have a large time period and there are no restrictions on possible profits. On the other hand, there are aggressive investors with discipline. They can limit the percentage of high-risk securities in their portfolio. This type of personality is more suitable for trading than for investing.

Cautious investor

This investor is cautious by nature, even shy. Risk scares him, and security calms him. Even the mere presence of too high a proportion of certain shares in his portfolio can cause great concern.

A cautious investor seeks maximum security and minimum risk. He is interested in bonds and other reliable financial instruments. Starting with more risky assets, a cautious investor is likely to change them in accordance with their emotional mood.

For a cautious investor, tools such as IIS (individual investment account), model portfolio or structural the products. These financial instruments have a low degree of risk and high reliability.

Briefly about financial instruments with a high degree of reliability:

IIS is a tool that is suitable for exploring stock trading. Its main advantage is the possibility of receiving a tax deduction from the state, which allows you to pay a smaller amount of tax or to return the tax already paid.

A model portfolio consists of several securities, selected according to certain criteria (for example, bonds or shares of one sector of the economy). This is a convenient tool for those who want to invest, but are not ready to engage in trade on their own.

A structural product (or structural note) is a financial instrument that provides an opportunity to earn income by participating in the growth and fall of an asset (security, currency, commodity).

Flexible investor

This investor is neither aggressive nor cautious. Rather, it is pragmatic, without prejudice, and easily adapts to circumstances. He avoids the self-confidence and complacency that lead to poor results. Usually, pragmatists are able to restrain such impulses. This profile is a kind of hybrid type of investor that balances between risk and profit.

Restless investor

This type of investor can be aggressive, pragmatic, and cautious, but he will always be worried. However, anxiety can often lead to poor investment decisions: over-purchasing of securities and too frequent changes in portfolio strategy.

A nervous investor can never do well in the market until he learns to control his anxiety, which causes destructive behavior. Investing in the market can be quite a stressful process even for self-confident people, and for those with chronic anxiety this can cause serious psychological damage.

Fast investor

Does not spend much time on decision making and analysis. He loves fast trades and fast trading. He seeks short-term benefits, which, in his opinion, are possible with the right system or knowledge of the market and investments. Such an investor is usually smart and well trained. But despite this, he can become a victim of his self-confidence. Some of them may convince themselves that they are successfully investing. However, in reality, the situation can be exactly the opposite.

conclusions

In a broad sense, investing is not a fundamental science. Rather, it is a symbiosis of science and art. For successful investments, many factors must be considered. And one cannot but take into account the psychology and patterns of human behavior. An investor cannot control the movement on the chart or the growth / fall of stocks. But he certainly can control himself and his habits.

None of the people are perfect and there are no “pure” types of investors. Often, investors to one degree or another possess several features of different profiles. The analysis of the set of characteristic behavioral patterns of the investor can favorably affect the results of investing and help to make successful decisions.

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