The importance and complexity of your willingness
to take risk is one of the many differentiating fac-
tors between managing investment portfolios for
large institutions and managing them for individual
investors. Because most investment products and
programmes are developed by institutions for in-
stitutions they fail to address this “human side” of
risk tolerance. Personality typing is a new tool that
is helping investment advisors better understand
an individual investor’s willingness to take risk
and behavioural tendencies.
Read on to learn more about what personality typing is,
how it can help you gauge risk tolerance, and how it
can give you insight into your decision-making
tendencies. Before we discuss the process of
personality typing, it is important to understand
that individual investors are unique and cannot
always be perfectly placed into a specific
personality type or category. However, personality
typing can help facilitate discussions with investors
about risk tolerance and can give you insight into
investment strategies that may fit your psychological
profile.
(Just because you’re willing to accept a risk, it
doesn’t mean you always should. Risk tolerance
only tells half the story.)

The Process
The first step in personality typing is to understand
your personal background. Interviewing investors
about their life experiences, inherited behavioural
traits, career paths and their current investment
portfolio can tell a lot about their willingness to
take risk and whether or not they have a tendency
to make emotional decisions regarding their in-
vestments. Once a good understanding of their
background is established, they can usually be
placed into a broad investor personality type.
There are four main personality types: cautious,
methodical, spontaneous, and individualist. They
are categorised below by willingness to take risk.

Lower Willingness to Take Risk
Cautious
Cautious investors make decisions based primarily
on feelings and are very sensitive to investment
losses. Fear drives their investment decision mak-
ing process. They have trouble making proactive
decisions regarding their investments and do not
trust the advice of others. For this reason, their
portfolios usually have low turnover and mostly
include safe investments.
Methodical
Methodical investors follow a disciplined, mechani-
cal investing strategy. They make investment deci-
sions based on hard facts and have the tendency to
nitpick about small details. They rely heavily on
investment research and are not emotional about
their investment decisions. They tend to be disci-
plined investors which can cause them to have a
lower risk tolerance.

Higher Willingness to Take Risk
Spontaneous
Spontaneous investors make investment decisions
based on feelings and make them frequently. They
are always second guessing themselves and the
advice of others, and often chase investment fads.
For this reason, their investment portfolios usually
exhibit high portfolio turnover and may include
riskier investments.
Individualist
Individualist investors make decisions based on
hard facts and do not second guess their invest-
ments often. They exercise independent thinking
and put a great deal of trust in their investment
research. For this reason, they are usually less risk
averse than others. Individualist investors are usu-
ally self-made and hard working.

Arriving at Total Risk Tolerance
Your personality type and willingness to take risk
can be used in conjunction with information re-
garding your ability to take risk to better judge
your total risk tolerance. Occasionally, your will-
ingness will vary greatly from your ability to take
risk. When this occurs, further education about
capital markets and investment risk may be re-
quired to resolve the issue. As you will see in the
side column (left), investors who use financial
advisors, experience a higher degree of satisfac-
tion and success. It may well be that an objective
third party, in the form of your advisor, provides
the unemotional advice you require.

Conclusion
When dealing with individual investors, building
a truly customized investment portfolio involves
a good understanding of both your ability and
willingness to take risk. Most generic investment
programmes and financial products do not prop-
erly address your willingness to take risk. The
growing acceptance of behavioural finance
makes it crucial to use new tools like personality
typing to help them better understand your risk
tolerance. Although self diagnosis may not al-
ways be healthy, personality typing can also be
used as a tool to give you insight into your own
investment biases and willingness to take risk.