Investor Type #6 – The Junior Genius

The Junior Genius is an investor who is full of himself. I didn't say full of herself because I haven't encountered very  many female examples of this type of investor.

The main characteristics of the Junior Genius is age (under 30 in most cases), arrogance, and a belief that they are the smartest guy in the room, and in fact they are even smarter than the market itself.

I have little patience for this type of investor and when I'm approached by them for consulting work I always turn them down. Unless, of course, they are willing to write me a big fat check, which I immediately cash and then proceed to tear them down until they either wake up or continue to boast about their prowess, in which case I politely excuse myself from the engagement.

 The Junior Genius, like most investors, operates under a set of cognitive and emotional biases that prevent him from achieving anything even close to success as an investor.

The most prevalent of these biases is overconfidence, which is a performance killer. This investor believes that he is smarter, and knows more about investing that just about everyone, and this belief leads him to make one stupid investment after another. 

Does he learn from his mistakes? On rare occasions, yes. A Junior Genius can turn into a skilled investor if he is willing to do some self-examination. But that's a rarity among this type.

1. Look in the mirror. Ask yourself if you truly believe that you can out-smart, out-trade, and out-perform the best investors on the planet? If you are willing to entertain the possibility that maybe you're not the smartest guy in the room, we have the seeds of humility, which will go a long way in your rehabilitation as an investor.

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.

Survivalists

This investor type seeks financial security and wealth preservation above all else. He or she is extremely sensitive to losses, and is driven by safety considerations over growth opportunities.

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 Ad hod investor

This investor type is lost in the wilderness. He/she has no idea what they're doing. They lack any sense of direction. They follow the lead of friends and colleagues, not understanding why one idea is better than another.  They are easily influenced by marketing pitches, t.v. ads, CNBC, and Uncle Louie. They don't have a clue, a plan, or a process.

The student of the markets

This is my favorite kind of client. Interested in learning, engaged in the process, and ready to put in the time. She or he knows a lot about market history because they know it's important to know where we've been before.

She or he also takes nothing for granted. Every investment opportunity must be vetted, using their own tried-and-true process to weed out the ones that don't measure up to their standards.

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.