Every investor is different. Each one has a different attitude toward the proper way to invest their investable assets. They each have their personal preferences in products and services, and they each know what kind of investment they want to avoid.
But investors can be categorized, at least initially, in terms of their overall investment strategy. Usually, it involves either their attitude toward risk, their attitude toward stability, or their attitude toward opportunism.
Spectrem’s study on affluent investor habits related to their assets tells the story of investment strategy in great detail. Asset Allocation, Portfolios and Primary Providers asked investors to put themselves into one of eight investment strategies, ranging from passive to contrarian, and including those investors who believe they operate without any strategy at all.
“This information, which is new to our study this year, defines the several types of investors based on their approach to the types of products they can invest in and the volatility of those products,’’ said Spectrem president George H. Walper Jr. “With the age and occupation breakouts as well, advisors can get a good idea of the different ways investors approach investing.”
It’s not enough to ask an investor how they feel about risk. While that question certainly aims at investment strategy, it does not pinpoint it. “Risk’’ is just one characteristic of an investor’s investment strategy. Others include volatility, expense and the end game.
The study included overall results from the question “how would you characterize your investment strategy?” and includes segmented responses based on age, wealth level, advisor dependency and occupation.
According to Spectrem’s research, 37 percent of Ultra High Net Worth investors with a net worth between $5 million and $25 million consider themselves passive investors. The definition of that strategy is an investor who “buys and holds in order to minimize transaction costs and to allow investments to grow despite the short term ups and downs of the market.”
In this case, “passive” does not mean “disinterested”. It is someone who is looking for products that will grow over time, and who does not want to have to make investment decisions daily based on short-term market adjustments.
This type of investor is good for the long-term relationship between investor and advisor. They do not need immediate results, but they regard long-term growth while having an interest in stable products for future investments.
On the other hand, 20 percent of UHNW Investors call themselves “active’’ investors, “moving in and out of investments, depending on the economy, investment performance and other factors”. This is an investor who is going to want up-to-minute details on the stock market and outside influences on the economy. This is also an investor who probably does not concern himself significantly with transactions costs, because they plan to make up the difference with their investment gains.
Two other choices were selected by at least 10 percent of UHNW Investors: conservative strategy (16 percent) and index strategy (10 percent). “Conservative strategy” is aimed simply at not losing any money on investments, and is thus very low-risk wanting a guaranteed rate of return. “Index strategy” is aimed at market index investments (from the S&P 500, for example) as a way to grow investment over a long period of time.
It is interesting that 2 percent of investors claim to have no investment strategy, which would make it difficult for an advisor to act accordingly.
Top Takeaways for Advisors
Advisors must guard against thinking that “conservative’’ or “passive” investors do not require frequent or constant attention. While there are investors who just want to put their money into a growth stock and leave it alone and not spend time on their investments daily, there are conservative investors who still want to be in the game. They just are looking for less volatile or active products to invest in. Do not be quick to judge against an investor who is risk-adverse or careful.
On the other hand, investors who consider themselves “active” investors, the ones who have an aggressive viewpoint toward their investment strategy, require constant attention. Some may want to make their own decisions, but any advice an advisor can provide to make their frequent investment choices work out for them would be appreciated. Don’t be afraid to talk to your more active clients on a regular basis to share advice.
©2017 Spectrem Group