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Get to know your investor profile to design your investment strategies

Defining your investor profile is vital to establishing objectives and designing precise investment strategies

«The greatest wisdom that exists is to know oneself», said Galileo Galilei, one of the most outstanding scientists and intellectuals in history. Although the Italian astrophysicist immersed himself in the bowels of the universe, or perhaps for that very reason, he always remembered that to undertake any great project, we must first know ourselves. This idea is valid for many aspects of our lives, and even more so when it comes to investing our money. Therefore, it is essential for a saver to know their investor profile before designing and implementing investment strategies that allow them to make their savings profitable. But what is an investor profile?

Each person who decides to invest his savings differs from the others, either because his objectives are different or because his financial situation is unique. Therefore, an investment strategy that may be suitable for one person is likely not ideal for another. Knowing our investor profile helps us to know ourselves before we sit down to plan our investments and, thus, choose financial products that fit our desires and needs.

The investor profile is associated, above all, with one of the crucial elements of any investment: risk. Only some people are willing or able to assume the same level of risk, which is why risk tolerance is fundamental in defining a saver’s investment profile. In addition, other vital aspects come into play, such as the desired return or the time horizon.

In the following, we will dissect what aspects must be taken into account to define the investor profile of a saver, as well as the types of investor profiles that exist.

Parameters for defining your investor profile

The spanish National Securities Market Commission (CNMV) defines the investor profile as «the relationship between the risks you are willing to assume and the returns you expect to obtain». This definition emphasizes the central role that risk plays in determining an investor profile and its relationship to return. The two Rs are at the heart of investment strategies.

In addition, and with the aim of defining an investor profile as precisely as possible, we must take into account other economic and personal parameters.

Risk tolerance

Not all people have the same level of risk tolerance. Some people love bungee jumping or parachute jumping, while others suffer every time they have to take a plane.

In the investment arena, risk tolerance is essential because every investment involves a certain level of risk. And in turn, each investment product presents a different risk. Investing in Treasury bills or bonds is not the same as investing in derivative products or shares of a company operating in an unstable economic sector.

Therefore, to define a saver’s investment profile, it is essential to determine the level of risk they are willing to assume. Depending on this, we may find, as we shall see below, aggressive, moderate, or conservative investors.

Desired return

Although it is not a rule written in stone, it is clear that, in most cases, a higher level of risk also implies a higher return. Conversely, a product that offers low risk will also have a lower return.

It is, therefore, essential when defining a saver’s investment profile to establish what return they expect to obtain when investing their money.

If neither the risk tolerance nor the desired return is precise, it is impossible to define the investor profile and design investment strategies that fit it. These strategies, like buildings, start with the foundations.

Time horizon

Another aspect that must be taken into account when seeking to define the investor profile of a saver is the time frame in which he expects to recover his investment. Time is so crucial in the investment field that it divides products into short-, medium- and long-term investments.

For this reason, when defining an investor profile, it is essential to be clear about the period they are willing to assume to recover the money invested.

Suppose a person wishes to make investments in the short term because he has liquidity needs or because he wishes to be very dynamic when investing. In that case, this must be included in the investor profile so that all investment strategies respond to this demand. On the other hand, another person may be willing to invest in the long term because he has no liquidity needs or is not in a hurry to get back what he has supported and can afford to be patient.

Risk tolerance plays a crucial role in defining an investor's profile.

Financial situation

Beyond the three classic aspects for defining an investor profile (risk, profitability, and time), it is essential to take into account other issues that influence these three parameters and also how the investor profile is defined, helping to complement and enrich it to make it as accurate as possible.

Among these aspects, it is undoubtedly worth mentioning the personal financial situation. Some people have different amounts of money saved, availability of cash, or obtain the same level of earnings.

The personal financial situation inevitably determines the risk that can be assumed, the profitability to be obtained, and the time horizon of the investments.

Therefore, when defining an investor profile, it is necessary to start with a rigorous analysis of the personal financial situation of the future investor. If this analysis is not accurate, the investment profile will not correspond to reality, and the investment strategies may be unsuccessful.

For example, even if a saver wishes to take out long-term investment products, an unstable financial situation marked by liquidity problems may discourage this type of investment. Hence, the economic crisis modulates the three previous parameters, combining the investor’s desires and knowledge with the reality of his finances.

Personal aspects

In addition to the financial situation, we must consider other relevant extra-economic parameters when defining the investor profile and designing investment strategies. What factors are we talking about? The investor’s financial knowledge, personal desires, and life stage.

A person with high financial knowledge may have a more aggressive investment profile, opting for more advanced products such as derivatives and assuming a higher risk. On the other hand, a saver with basic financial knowledge should invest in products that are easy to understand and manage, such as crowdfactoring, and which present a medium or low level of risk.

However, this does not prevent a person from assuming a more aggressive investment profile based on his instinct and personal characteristics, even though his financial situation or knowledge may recommend a more moderate investment profile. Each person is different, and aspects of our personality, such as our instinct or our way of facing life, come into play in the investment field. Although objectivity should govern our decision-making, it is evident that there are subjective aspects that come into play and modulate our investment strategies.

Age is also important when defining an investor profile because risk tolerance and time horizon are directly associated with it. A 70-year-old person will want to avoid taking out a long-term product whose returns they may not be able to enjoy. On the other hand, a 30-year-old saver may decide to invest in a pension plan with the long-term future in mind.

Objectives that go beyond profitability

In recent years, the destination of the money invested has become very important when designing investment strategies. Financing companies in the real economy that generate wealth and employment, innovative projects, or sustainable companies are decisions that have acquired great relevance and affect the investor profile.

Why? It is no longer only profitability, risk, or time horizon that matters. Investors want to know what their money is invested in, and this marks their investment profile, as this motivation is transferred to the products in which they invest. A product may fit the classic parameters, but the investor profile may advise against investing in it. Consider, for example, a person who wants to finance sustainable companies but wants to avoid investing in specific sectors.

Although getting a return on our money still occupies a central position in the field of investment, more and more people give transcendental relevance to the destination of their money, which must be considered when defining the investor profile.

The same investor may first have a conservative investment profile and later a dynamic one

Types of Investor profiles

Based on the parameters described in the previous section, the three main types of classic investor profiles (conservative, moderate, and aggressive) can be established, and two other classes (dynamic and committed) can be added to them:

  • Conservative. If an investor has a low-risk tolerance and is willing to sacrifice part of his investment returns in exchange for playing it safe, we can conclude that his investment profile is conservative. Risk is the critical parameter they take into account when designing their investments. This type of investor tends to opt for fixed-income products, such as Treasury bonds, as well as insured products, and, on the other hand, only sometimes dares to invest in variable-income products. These investors do not want to take losses on their investments. And for them, stability is a priority.
  • Moderate. In this case, the investor is willing to assume a higher risk in exchange for a higher return. Investment strategies designed according to this profile usually combine fixed-income products with equity products. And the same can be said about the time horizon of investments, combining short, medium, and long-term effects.
  • Aggressive. As far as the aggressive investor profile is concerned, the most important thing is to obtain high returns, even if this means taking high risks. These investors tend to opt for variable return products to maximize the profitability of their investments, even if this means taking losses. This type of investor tends to be more financially savvy, which leads them to invest in more complex products such as futures or options. They are also willing to make long-term investments to achieve high returns.
  • Dynamic. The dynamic investor is willing to assume a certain level of risk to obtain higher returns on their investments. In addition, they are characterized by diversifying their investment strategies, having knowledge of the market, and combining different types of investments. They are also prepared to assume the volatilities of the financial sector.
  • Committed. Committed investors are those who, without ever giving up on profitability, decide to finance socially and environmentally responsible companies and projects. This investor profile seeks to generate an impact on society through their investments while at the same time making their money profitable.

The investor profile is flexible and changes over time

These types of investor profiles should not be understood as closed concepts. An investment strategy can combine characteristics of different profiles to get as close as possible to the elements and objectives of each investor.

Thus, products closer to a conservative profile can be combined with riskier investment mechanisms and ethical investment channels.

Today, the consolidation of alternative financing platforms, such as the Inversa Invoice Market, and the digitalization of the investment sector has opened up the range of products available to investors in such a way that investment strategies can be diversified and adapted to the changes that occur, over time, in the financial situation, knowledge and objectives of an investor.

A saver starting in the field of investment will probably prefer to begin with a conservative investment profile until they have accumulated experience and knowledge. And, later, to implement more dynamic or aggressive strategies. A person may opt for short-term products because he wants to have constant liquidity, and, at other stages of his life, he may be willing to bet on long-term effects because he can afford not to dispose of the money he has invested.

In an increasingly liquid world, it makes no sense to conceive of the investor profile as a monolithic issue. On the contrary, the profile changes over time, which must translate into investment strategy changes.

Clarity and reflection for sound investment decisions

The investor profile concept is intended to help savers design their investment strategies. To this end, it calls for the need to know oneself very well before entering the financial market.

When defining the investor profile, a person must be clear about the basic aspects of any investment strategy: profitability, risk, time horizon, destination of the money, liquidity needs… With this information, an investor can design strategies to achieve his objectives.

Traditionally, investors did not make all the decisions about their investments but delegated this function to specialized advisors. Web and mobile applications, access to all information through the Internet, and the emergence of alternative financing platforms have democratized access to investment and made it possible for investors to be fully autonomous.

Hence, defining the investor profile is more important than ever. It allows savers to make the right investment decisions and achieve their goals successfully.

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