Finance and the City: Investor Risk Types

Posted By: Advisor Analyzer Team

If you’ve never watched an episode of the HBO hit series “Sex and the City”, you’ve probably never had a girlfriend who’s a remote hog.  To save you the trouble of purchasing the DVDs, the show revolves around four women with distinct personality traits.  Much like the TV show, there are psychological characteristics that distinguish one investor from the next in the world of finance.  Advisors should be aware of these different personality types when determining the most suitable recommendations for investors.

The Methodical Investor

In the show, Miranda is a lawyer at a New York Firm.  Like most lawyers, she tends to analyze situations objectively, and rarely lets her emotions get the better of her decisions.  Were she to invest, she would undoubtedly be methodical. 

 

Methodical investors tend to rely on objective “facts” when making investment decision.  They intently follow market analysts and research on trading strategies in their quest for newer and better information.  Methodical investors rarely attach emotions to their investments and their decisions tend to be more conservative in nature, especially when ambiguity is presented.

The Cautious Investor

Charlotte is the most conservative and emotional one of the four characters in the show.  Despite the advice given by her closest friends, she firmly believes in following rules and playing it safe when it comes to dating.  From day one, she is desperately seeking the man with whom she’ll spend the rest of her life with and is uncomfortable taking chances with random men.

 

Similarly, the cautious investor is very averse to potential losses and often emotionally invested in their portfolio.  They exhibit a strong need for financial security and do not like taking chances when dealing with financial decisions.  They are not easily persuaded by the investment advice of others and tend to over analyze every opportunity.  They focus on safe, conservative investments with predictable returns, which usually lead to low volatility and low turnover portfolios.

The Spontaneous Investors

Samantha Jones is an outspoken and uninhibited public relations executive. She is the most promiscuous character of the show, sleeping with men on whim. A part of the “It” crowd, she follows the latest trends and attends the latest parties to rub elbows with the rich and famous.  

 

If any word could capture her character, it would be spontaneous. Spontaneous investors are always watching CNBC or Bloomberg to be up to date with the latest “hot” investments. Risk considerations take a back seat to the fear of “missing the next big thing” in the investment decision making process. The pursuit of the most recent investment craze creates the need for continuous adjusting and rebalancing of their portfolios. Their returns are often below average due to transaction costs associated with high turnover and trading.  

The Individualist Investors

Last, we have our narrator and heroine of the show: Carrie Bradshaw. Carrie is a free thinking writer, with the confidence to make her own mistakes, and come up with her own conclusions. She puts in the effort to date new and different people and in the process discovers more about herself. Each relationship is viewed as a new life experience and there is always a lesson learned at the end of every episode.  

 

The individualist investor exhibits independent thoughts when making investment decisions. They are not afraid of doing their own homework to research a new idea. Their confidence makes them capable of questioning inconsistencies in either recommendations or conclusions made by others such as their advisor. They are willing to take calculated risks and open minded to investments that make sense. Most likely, if you are reading this article, you are an individualist investor.  

Conclusion

If nothing else, “Sex and the City” taught its viewers women are intricate individuals with unique personalities. The purpose of psychological and personality profiling is for the advisor to better understand an investor’s potential reaction to a gain or loss. Investors react to fluctuations differently, and advisors must use a personal approach when working with each client. Much like dating, being aware of each investor’s perception of investments and risk can result in a relationship that can end happily ever after.