The investor profile : a key concept in trading

Financial theory cannot provide a single answer for everyone. Your financial decisions must take into account your own characteristics and personal goals.

Warren Buffett, Jim Simons, Ray Dalio, Howard Marks, George Soros, Mark Minervini, Nassim Taleb... We read about successful investors everywhere, but their stories are different. There is no one way to make money in the stock market. To know which strategy to follow, you must first define your investor profile.

What is an investor profile ? How do you define your investor profile ? Which strategies are best suited to your profile ?

Here is a complete summary of the information you need to know to properly define your investor profile.

What is an investor profile ?

Behavioral finance has long studied how human biases and other psychological phenomena affect trading, and the findings are clear: our personal circumstances affect the way we invest. We are all at different stages in our lives, we have different goals, and we therefore manage risk differently. Some people don't worry about getting rich and prefer to keep their assets in low-risk annuity products, while others don't mind having to bear large unrealized losses if they end up getting rich from their trades.

In addition to risk tolerance, the investor profile can also take into account personal characteristics such as age, income level, asset strength, investment horizon and liquidity needs. In short, your investor profile is based on your personal situation and objectives.  

 Why take the time to build your investor profile ?

To plan your finances properly, you need to consider not only your current situation, but also your future plans. For example, if you know you'll need money in 6 months to buy a car, don't put your money in a highly volatile stock. Market prices are largely random, so it's difficult to accurately predict asset returns, especially in the short term.

Volatile investments are best suited for longer periods. Understanding your investor profile helps you avoid getting into an uncomfortable situation. Since most people are not investment professionals, their number one priority is their job. So if an investment is keeping you up at night or interfering with your ability to work, you're not in the right strategy for your profile. Besides, if you don't want to spend all your free time studying the markets, you can invest passively, use a trading robot, or choose a mutual fund so that a professional can actively manage your money. 

How to determine your investor profile

Different factors are taken into account in the development of an investor profile. Here are the three main points on which you must be particularly vigilant.

Your age

A rather young investor can take more risks in their investment strategies. Indeed, as the years go by, the short-term volatility (called "market noise") disappears to leave only the underlying trend. 

Conversely, an older person's time horizon will necessarily be shorter, and he or she will prefer to focus on preserving or passing on his or her assets, not on growing them.

Your personal finances

What is your level of savings ? What are your sources of income ? What are your recurring fixed expenses ? The state of your personal finances and your future needs (financing your children's education, becoming a homeowner, preparing for retirement, etc.) are components that should not be neglected, as is the level of taxation to which you are subject.

Your level of risk aversion

Beyond the objective criteria listed above, other more subjective criteria must also be taken into account. Among them, your level of risk aversion is probably the most important. In difficult situations (financial crisis in particular), most investors panic and often sell their positions at the worst possible moment... Taking the time to evaluate your stress resistance level to be sure you have strong enough nerves when your investments are in the "trough" is essential.

Getting to know yourself

"Know thyself", this sentence inscribed on the frontispiece of the Temple of Delphi, is certainly one of the most accurate instructions when it comes to investing in the stock market. By carefully defining your investor profile, you can choose the trading strategy that best suits your needs.  Many individuals who are busy with their work or leisure activities during the day opt for day trading strategies with the help of automated solutions.