There’s a saying that a volatile stock market doesn’t make you lose money, your behaviour does.
So if you get nervous when markets fall—as they are doing now—and pull money out, you lock in a loss that may be avoidable in the long run.
Increasingly, financial advisors say understanding an investor’s money personality is just as important as assessing risk appetite. Because traditional risk questionnaires often fail when markets actually tumble.
Advisors say investors typically believe they have a high risk appetite when stocks are rising. But when they see their principal shrinking, their reactions tell a different story.
The psychology test
How you behave in a market downturn—or otherwise in relation to money—has a lot to do with your psychology towards money.
“Post this kind of analysis, forget us being able to understand our clients, the clients start understanding themselves better. That helps them a lot,” said Renu Maheshwari, a Sebi registered investment advisor and founder of Finscholarz Wealth Managers.
“These are the times which will test” their tolerance, said Rohini Pamarthi, assistant vice president at financial advisory firm International Money Matters.
Pamarthi said they ask clients questions about their relationship with money while growing up, money mistakes they’ve seen others make, and similar experiences to decode their money psychology.
For instance, people whose childhood was spent in an austere home where parents struggled to make ends meet might grow up to be extremely careful with money because they don’t want to face scarcity again, said Pamarthi. “When they think of money, they get scared,” she said. This in turn impacts how they spend, save and invest.
Understanding clients' emotional map helps manage their reactions when markets move against them. “You know how they will react, how you have to calm them down,” she said.
Combining this knowledge with risk profiling can meaningfully impact behaviour. “We are able to achieve long term success with our clients because we are able to nudge their behavior a little more objectively,” said Maheshwari.
It helps clients too. “The more you are self-aware about your behavior, your thought process, the more you’ll be able to think rationally,” said Brijesh Parikh, an RIA and founder of Planetwealth Financial Advisors.
Types of money personalities
Money psychology is still a nascent field, and there is no standard methodology or nomenclature around it. Individuals can also exhibit traits of multiple types.
Here are some broad financial personality categories and what they mean for your money.
1. The avoiding type
Such people don’t like to think or talk about money, either because they find it overwhelming, or because they think money is basically evil. They leave it to someone else to manage their finances. This could be problematic if they don’t have a grip on their financial situation. Studies have shown money avoiders make poor financial decisions and have lower net worth.
It’s advisable to set aside time to check your monthly spending or account statement to know where your money goes and what your financial liabilities are, so that you are not caught off guard.
2. The spending type
These individuals spend impulsively without evaluating affordability or necessity.
When the covid-19 pandemic struck in 2020, many people began spending aggressively, embracing YOLO—You Only Live Once, said Parikh. While that’s great in the short term, if there are no checks to this, it can lead to financial problems and potentially debt.
Pamarthi shared the story of a client who has spent the generous income she made over the years and now has no savings despite being just a year away from retirement. “She’s worried,” said Pamarthi.
It’s advisable to look at your income and spending to understand what you can afford. If you can’t control the spending urge, set aside an amount, say in a different bank account, which can be spent loosely without impacting your overall financial goals.
3. The status seeker
For these individuals, money equals status. Spending decisions are often influenced by comparison—bigger homes, luxury cars, expensive vacations.
Like spenders, status seekers risk stretching finances beyond sustainable limits and accumulating costly debt.
What helps: Anchor spending to clearly defined financial goals and long-term planning rather than social signalling.
4. The saving type
Such people fear unnecessary spending, look for bargains in shopping, and generally avoid debt like the plague. Often, money represents security for them. While saving is generally a good thing, being too saving-focused can have negative implications.
“Somewhere you may not be enjoying your life, if you count everything,” said Pamarthi. Such people could also be too conservative in their investments which could make it hard to achieve their long-term financial goals.
It’s advisable to make an investment plan based on your income and needs, and loosen up a little on spending.
5. The financially anxious type
It’s one thing to save money, but another to fret about it constantly. Some people who are doing financially well, with no debt, remain worried that the money will run out or may not be enough in the future. Too much of this worrying can cause stress, and create conflict with family members who may wish to spend some money to enjoy life.
It’s advisable to seek an objective financial assessment and maintain a clear emergency fund to ease worst-case fears.
6. The gambling type
They are prepared to take big risks to get big rewards and like the thrill of winning. They think: “I don’t want to do any calculations, let's gamble, if it comes in favour then it will be beneficial otherwise, we’ll lose money,” said Parikh.
This could have implications for finances if things go wrong with the big bets.
It's advisable to set aside a portion of savings for making these all-out high-risk bets, while keeping the bulk of your money in places that suit your financial goals.
7. The balanced investing type
These individuals seek growth but through a structured plan.
“He knows that saving money alone isn’t enough, and that he has to stay ahead of inflation or beyond,” said Parikh. Such a person will have an investment plan with a healthy amount of risk for growth.
It’s advisable not to be overconfident and to stay focused on long-term goals rather than short-term growth, while also keeping a check on spending and budget.
Advisors say there are no ‘good’ or ‘bad’ money personalities. Understanding which personality you’re more closely aligned with can help give you more control over your finances. Also, attitudes towards money can change with time, stage of life and experience, which in turn may have implications for your investments.
“It needs to be continuously looked into,” said Parikh.