Investor Type #5 – The Sweet Doomed Angel

 The Sweet Doomed Angel is eternally optimistic, and as a result she believes that hard work and diligence is enough to master the tradecraft of investing. She believe that the playing field is level, and that there is some regulatory authority watching everything that goes on and pounces on bad actors at the first sign of misbehavior.

I have had many of these folks as clients over the years, and I enjoy working with them because they tend to be more open to new ideas than their less-optimistic peers. It takes effort to disabuse an Angel of her overly-optimistic views of how things work, but eventually they come around.

My main argument for anyone who believes that markets are fair, open, and well-regulated is that investing is a bloodsport. It's survival of the fittest, and the fittest are those who have access to the best information. The first thing I stress to these investors is that they are at an information disadvantage compared to other investors who have big accounts and lots of connections on the street.

However, this doesn't mean that a small, retail investor can't thrive in the game. It just means that they must have a realistic view of the rules of engagement, and focus on the few advantages they have over the big money players.

1. Become more skeptical. This may seem hard at first, but it only requires having a checklist of questions to be used before any trades are executed.

2. Create a short list of trusted advisers. I don't mean financial advisers who will take advantage. I mean friends, family, work associates who have experience in the market and are willing to mentor this earnest person about what they have learned.

3. Hire an independent, bias-free  coach or consultant to get the basics of investing down. Someone who has lots of experience as a professional investor, and charges an hourly fee for advice, education, and training. Do not choose someone who has a "super-duper-can't-lose" trading system they want to sell.

4. The most important step of all - create an investment plan. It doesn't have to be complicated. It only has to be well-thought-out, and based on logic and common sense. There is a wealth of knowledge on this subject that is free to anyone who takes the time to do some research. Bogleheads is a great place to start.

The set-it-and-forget-it investor

This type of investor wants convenience above all else. Everything is set on autopilot. Automatic contributions to investment funds come out of every paycheck. This type of investor doesn't spend much time or effort thinking about investing, and doesn't need to since everything is automatic. They don't have to remind themselves to invest; it's all done by computer algorithms.

The potential downside for this investor is losing touch with where the funds are going and how the portfolio is performing. If you are not paying attention, you may not have investment selections that meet your current goals, and you may not identify and remove low performing investments or funds with high fees. If you don't check in at least occasionally, this hands-off approach may cost you. Rebalancing your portfolio once or twice a year by transferring funds to maintain your desired proportions of stocks to bonds should be sufficient to keep your investment portfolio on track.

The Tape Watcher

The tape watcher is paying attention. They know if the stock market is up or down. The current market price and chart is only a tap away on their phone. This type of investor knows how much their portfolio is worth and worries about how much they are losing when the market has a bad day. Nothing gets past the Tape Watcher.

The risk for this type of investor is that he or she can easily get stressed out by day-to-day ups and downs in the market. They may even get discouraged when the market is going down and decide to sell when prices are low — bad idea. It's good to be informed, especially when it comes to your investments, but if you find yourself too glued to the market's daily performance — it might be a good idea to step away from the news for a bit. Checking in on the stock market and your investment portfolio quarterly is probably enough, and you can use the time you save for something more productive and enjoyable.

The Stock Jockey

The stock jockey is constantly looking for action. This type of investor tries to time the market by betting that a stock is going up before other investors realize it — and then selling when it is near the peak price before most investors figure out that it is going down. This type of investor pores over market and economic data, reads business articles, and is well-informed about business trends and news. He or she is willing to take risks for a chance at big returns.

If you're a Stock Jockey, be careful; you can easily lose significant money if your timing is off. Trading fees can also get expensive if your investment approach requires making a lot of trades. You are much more likely to make money from buying good stocks and holding them for the long haul.

The Moral High Ground investor

These investors put their money where their morals are. They have limits to what activities and products they are willing to be involved with. For example, some conscientious investors invest only in socially-responsible or environmentally-responsible companies, and avoid owning shares in companies that promote values or products contrary to their moral principles. This type of investor is likely to exert economic influence through consumer purchasing decisions as well as through their stock picks.

This type of ethical investing unfortunately can limit a person's investment options, which may result in lower returns. But some things are worth more than money to Moral High Ground investors.

The Bargain-bin investor

This is the kind of investor that loaded up on GM stock when it was $1 per share in 2009. Of course there is risk that bargain stocks could become worthless, but there is potential for the stock price to bounce back. The bargain-bin investor looks carefully at P/E ratios to check the share price relative to earnings per share when deciding what stocks to buy.

Bargain-bin types should be wary though — sometimes stocks with low prices are trading at a low price for a good reason. The bigger the bargain, the more research is needed to find out why the price is so low.

Company loyalist

The company loyalist owns a disproportionate amount of stock in one or two companies. This could be a trendy stock that inspires loyalty like Apple or Tesla, or the company loyalist could own a large amount of his or her own employer's stock.

Owning a large amount of any single company stock can be risky. The company could experience a major scandal or product failure and the stock price could tank. Remember Enron? Owning a lot of stock in the company you work for is even riskier, because if something goes wrong you'll not only lose value in your stock fund, but you may lose your job at the same time. Some financial advisers suggest that owning more than 10 percent to 15 percent of your company's stock may be too much.

The Portfolio Tweaker

The portfolio tweaker is not really an active trader, but likes to fine-tune his or her portfolio frequently by making transfers between funds to get the desired balance between large cap, mid cap, small cap, foreign, domestic, growth, value, and bond investment categories.

While it is good to adjust your portfolio occasionally to meet your investment goals, frequently selling investments that are performing well just to meet an arbitrary "balance" in your portfolio may not be the best move and could hurt your overall returns. Portfolio rebalancing once or twice per year is a good interval for most investors.

Active investors  like to be in control of their investments, as they are in control of their professional lives. They want to be actively involved in investment choices and financial affairs in general.

Passive investors prefer security over risk when choosing investments. They achieve this through diversified portfolios invested in established, brand-name companies and funds.

 Within these two broad categories, researchers have identified several investor types:

Busy investors

The busy investors are interested—some might say obsessed—with the markets. They follow the ups and downs of equity, gold, or real estate prices. As a result, they tend to buy and sell frequently, often based on what they see others doing. The day-traders popularized a few years ago, fall into this type. These active investors can also be high rollers, willing to take a chance on market volatility rather than sit it out. They often share personality characteristics with entrepreneurs, for whom financial success is a scorecard.

Casual investors

The casual investors are the opposite of the busy investor. Once an investment is made, they tend to let it ride believing that it will take care of itself. These passive investors tend to trust in the advice of their financial advisors. They typically prefer safe investments that have proved their value in the past. Sometimes, their laissez-faire approach to investment is a sign of their optimism that everything will work out well in the end, if you just let things take their course. Besides, there are a lot more fun and interesting things to do than worry about your investments, right?

Cautious investors

The cautious investor tends to be the most risk-averse, putting financial security first. They take their time when faced with decisions, preferring to weigh all of the options before choosing. Afraid of making mistakes, their pursuit of the perfect decision can mean making no decision at all. This puts them in the passive investor category. Older investors, who are more interested in safeguarding their resources and have a shorter horizon for recouping losses, often fall into this type.

Emotional investors

The emotional investors put their heart into their investment decisions, not their head. For example, they are likely to invest in companies because they use and like the firm’s products, regardless of the stock’s performance, or to hold onto real property in a depressed neighborhood for sentimental reasons. They can be a blend of active and passive in their approach, eager to make investments they feel committed to, but unwilling to let go of those that have outlived their value.

Informed investors

These informed investors tend to take a well-rounded approach. They are careful to stay up to date, using a variety of sources to fill in their understanding. While confident of their own financial acumen, they also are willing to listen to the advice of experts, and to act decisively. Often high achievers in their professional lives, they typically have a strong work ethic and may seek the same sense of control and accomplishment in their investments.

Technical investors

Technical investors share some characteristics with busy investors, but they tend to analyze the numbers and read the pundits rather than reacting to every market move. They may spend a lot of time on their computer screens, but feel that their diligence is rewarded if they spot a trend earlier than others. Their desire to get an edge on the markets often leads them to buy the latest technology. These active investors are very involved with the management and choice of their investments.

No matter where you fall on the spectrum of investment types, you owe it to yourself to look into self-directed retirement savings accounts. Active investors appreciate the ability to buy and sell a range of assets—a more diverse array of assets than are typically available through a bank or brokerage house. More passive investors can be secure that once their investment assets have been bought, they can relax and let the market do its magic.