What Is Your Financial Personality?

In part 1 of this series we talked about the three main factors that determine your outlook on investments: Your investment goals, risk tolerance and the ability to cope with uncertainty. If you take these three factors together you can determine a person’s overall financial personality.

Every investor has a very individual (financial) personality. Therefore it is difficult to make generalisations and one has to look at every investor very carefully on a case by case basis to give valid advice. This said, we have tried to devise three ideal prototypes of investor personalities. In the following we will have a look at those prototypes, and the typical asset allocations that suit them. Please bear in mind that these type are a very general representation of the often confusing reality of real people :

Personality A: “Conservative type”

• Typical goals: Wants to protect his assets over short-term as well and generate considerable income from his assets. His targeted rate of return should not be considerably above the inflation rate – probably between 1% and 3%.
  

• Risk tolerance: This investor does not like risk at all. On average, he is somewhat older and has a shorter investment horizon. If he is retired, he may need regular income from his assets. It is also probable that this investor will need his assets to fund a big project in a not-so-distant point in future.
  

• Ability to cope with uncertainty: Peace of mind in financial matters is crucial for the conservative type. He wants to feel safe about his investments, especially in times of financial turmoil. He may also be getting nervous about assets that have appreciated significantly in value.
  

• Recommended asset allocation: We believe that stocks should be clearly less than 40% of the asset allocation and bonds plus cash should form a big chunk, typically more than 50% and up to 80%. Other asset types like hedge funds, real estate and commodities may be part of the portfolio but would play only a minor role of less than 10%.
  

Personality B: “Balanced type”

• Typical goals: Asset protection is important to him; however, he is willing to trade off some security for the long-term capital appreciation of his assets. He may also require considerable income from his assets. His returns should reach 3% to 5% after inflation.
  

• Risk tolerance: The risk appetite of this type of investor is somewhat bigger. He may tolerate mild losses for a limited period of time. He could be of any age but his investment horizon is usually more than two years. He rarely depends on regular cash flows from his assets.
  

• Ability to cope with uncertainty: Uncertainty may be a problem for him if high volatility persists for a prolonged period. This type of investor may be able to stomach uncertainty for a shorter period of time or if high volatility is limited to smaller portions of his portfolio.
  

• Recommended asset allocation: In this case we would recommend a stock allocation of around 40%. Bonds would be roughly in balance with stocks. Cash should be a small proportion of the portfolio. Other asset classes like hedge funds, real estate or commodities could represent up to 25% of assets.
  

Personality C: “Long-term investor type”

• Typical goals: Long-term appreciation of his asset base. Looks for a rate of return between 6% and 8% after inflation.
  

• Risk tolerance: This type of investor has time on his side. He has a long-term perspective. . He knows that stocks could be “underwater” for a long time until the market rallies back. But he does not care. His mantra is “buy and hold” because he knows that stocks (and only stocks) will bring him a real return between 6% and 8% over the long-term. He can also rest assured because he is generally not dependent on cash flows from his assets.
  

• Ability to cope with uncertainty: This type of investor is not perturbed by downturns or upswings. He does not get nervous looking at falling stock-market quotes.
  

• Recommended asset allocation: This investor type will hold more than 50% and up to 80% of stocks in his portfolio, the rest being a mix of bonds, cash, hedge funds and real estate.
  

In the next part of this series we will talk about how you can practically determine your own type. We have defined a set of questions that will help you to have a look into the mirror and get a clearer picture of your own financial personality.