Investor type helps advisors better understand how clients behave when the market goes up and down. Adapted from research by Dr. Andrew Lo of MIT, a short questionnaire assigns an investor to one of the following categories.
Common Investor Types
Passive Investor
A typical passive investor believes in buy-and-hold strategies. They tend to do nothing when the market goes up or down and do not check their portfolios very often.
As a result, they will typically choose A for Q1, B for Q2, D for Q3, and B or C for Q4.
About 35% of investors are passive investors.
Trend Follower
A typical trend follower tends to chase market trends—buying when the market goes up and selling when the market goes down. As a result, they will typically choose B for Q1 and C for Q2.
While momentum-trading strategies are common among professional asset managers, retail trend-following investors are often driven primarily by the (common) emotions of greed and fear, along with misperceptions of market risk. During bull markets, perceived market risk is often lower than the actual risk. During periods of market turmoil, perceived market risk is often higher than the actual risk.
During the market turmoil of the pandemic (early 2020), they would likely have sold before or around the time the market hit the bottom.
They tend to check their investments often, though if they are busy, they may not.
About 27% of investors are trend followers. They tend to need more hand-holding.
Contrarian
A typical contrarian tends to go against market trends, buying when the market goes down and selling when the market goes up. They will typically choose C for Q1. During bull markets, they may either sell or stay invested a bit longer. During the market turmoil of early 2020 (during the pandemic), they would have increased their allocation to stocks.
They tend to be disciplined investors. Only 8% of investors are contrarians.
Non-typical Investors
A non-typical investor is someone who exhibits conflicting behaviors. Here are a few examples:
An investor who shows the traits of a typical passive investor for the first three questions but checks their investments daily or weekly.
An investor who shows contrarian traits in Q1 and Q2 but passive investor traits in Q3.
Non-typical investors can be either sophisticated investors or beginner investors.
Additional Investor Types
See the mapping table below:
This table summarizes how answers to each question map to the investor type.
| Investor Type | Description | Typical answers to the questions | % of Investors |
| Passive Investor | Believes in buy-and-hold strategies, does nothing during market ups and downs, often invests in index funds, and does not check investments often. | A for Q1, B for Q2, D for Q3, B or C for Q4 | 35% |
| Trend Follower | Tends to chase market trends—buying when the market goes up and selling when the market goes down—and may check investments frequently. | B for Q1, C for Q2, A or B or C for Q3, any for Q4. | 27% |
| Contrarian | The opposite of a trend follower—selling when the market goes up and buying when the market goes down. | C for Q1, any but C for Q2, E for Q3, any for Q4. | 8% |
| Safety Seeker | Values safety above all else; sells when the market has too much upside or downside, and often has unrealistic return expectations (be sure to discuss this). | B for Q1, A or B for Q2, A or B or C for Q3, any for Q4. | 19% |
| Risk Seeker | Seeking risk. | C for Q1, C for Q2, E for Q3, any for Q4. | |
| Adaptive Investor | Willing to stay put during short-term fluctuations but adjusts for larger market trends. | A or D for Q1, A or D for Q2, A or B or E for Q3, any for Q4. | |
| Other (Non-Typical Investor) | Inconsistent investment behavioral patterns. | Combinations that do not match the above. |
How to use Investor Type?
A client’s investor type has a major impact on the advisor–client relationship; therefore, it is part of the “Risk Tolerance Plus” flow and the first priority to present to clients.
You can also use it to screen prospective clients. For example, trend followers often require more hand-holding and may not be a good fit. It also helps you tailor conversations with existing clients.
How are Investor Types correlated with Behavioral Biases?
While investor type and behavioral biases are assessed independently, there are some correlations. For example, trend followers tend to believe they can time the market, reflecting overconfidence in their capabilities. They also tend to exhibit herding, another common behavioral bias, even if they may not recognize it themselves.