An investor’s profile determines the type of investment tools and products best suited to them. It is based on a series of parameters ranging from risk aversion, expected return, and time horizon to personal finances. We will go deeper into the investor profile. What it is, what types exist, and its importance for investments.
An investor’s profile is a key factor in choosing them and the tools with which they will invest. We analyze the investor profile, what types of profiles exist, and why it is so important for investors.
What is the investor profile?
The investor profile is the most advisable position the investor should take according to a series of parameters. In general, these parameters are the following:
- What profitability he expects to obtain with his investments: The higher the profitability, the more risk is assumed, and the more aggressive the investor is considered to be.
- What risk he is willing to assume: related to the above, the amount of risk the investor is willing to accept is another determining parameter of his profile since it will limit the tool with which to operate.
- In what period he expects to invest: This is another determining parameter to knowing the investor profiles. Investing in the short, medium, or long term is not the same when determining which investment model is the most suitable.
In addition to all of the above, and as a determining factor over these three, is the investor’s financial situation—the capital available for investment, the impact of risk levels on that capital, etc.
Types of investor profile
Although they are given different names, three very clear types of investor profiles are generally recognized:
- The conservative investor: this is a risk-averse investor. He prefers tools that do not over-commit the capital provided and therefore chooses instruments such as fixed income, time deposits, etc. They assume their profitability is lower due to the lower exposure to investment risk.
- The average or moderate investor is an investor seeking to obtain higher returns than the conservative profile but assuming less risk than the aggressive profile. For this reason, they tend to combine and diversify their portfolio by balancing investment tools. He will adjust the fixed-income or more conservative products to a greater or lesser extent depending on the risk he wants to assume, incorporating, for example, equities to seek profitability.
- The aggressive investor: in this case, the investor seeks the maximum possible return on his investments. Generally, his investment portfolio will be oriented towards equities. But this does not mean he is a suicidal investor, as he will generally diversify with less exposed equity assets and fixed-income investments.
It is important to bear in mind that the investor profile does not remain stable and is unique for life. Although personality biases determine how we behave in the face of investment, the passing of years and the improvement of personal finances are determining factors that can modify the risk profile.
Why is it important to know your investor profile?
It is important to know your investor profile because, when selecting financial products or investments, you will have to determine whether or not they are suitable tools for you. The way to do this is to compare your investor profile with the type of product you are dealing with. For example, a conservative profile will not invest in cryptocurrencies. An aggressive profile will not contract fixed-term deposits, etc.
How to find out the investor profile
Generally, the investor profile will initially be defined by the individual and their aversion to risk. However, other factors come into play later on. At the beginning of the investment, the aversion to risk always determines the choice of products, even more than the search for profitability.
Subsequently, numerous investor profile tests can be carried out to determine risk tolerance. Usually, these tests will focus on questions related to the parameters that define the investor profile, as described at the beginning.