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Engaged or Disengaged? 2 Types of Investors, Explained

Knowing the difference is crucial to helping them reach their goals

Jake Spiegel


In my paper examining the extent to which a stereotypical investor exists, I took a closer look at different types of investors. I put investors into two categories: disengaged investors and engaged investors. Disengaged investors invest exclusively through tax-advantaged retirement accounts, such as workplace-sponsored 401(k)s or IRAs. Engaged investors are those who make a conscious choice to pursue investment opportunities outside of those provided by tax-advantaged retirement accounts.

Who are engaged and disengaged investors?

Disengaged investors account for the majority of investors. Indeed, it’s possible that some investors that fall into this category might not even invest in the market were it not for their participation in workplace-sponsored retirement plans. This serves as a useful reminder that inertia is a powerful force, and that choice architecture – that is, automatic enrollment in workplace-sponsored retirement plans – can help overcome that inertia.

Engaged investors, meanwhile, actively seek out other investment opportunities. These investors hold assets in taxable brokerage accounts, which they might use differently than their retirement accounts in order to meet their financial goals. For example, they might use invested assets outside of retirement accounts to save for future expenses, such as a home purchase or to finance education.

How do these two types of investors compare?

I found some significant differences between disengaged investors and engaged investors. Even though the median age is about the same for both types of investors, engaged investors tend to earn more and tend to be better-educated than disengaged investors. Most importantly, engaged investors have significantly more retirement savings than disengaged investors. A significant difference persists in a regression analysis in which I control for age and income. This suggests that the difference between engaged investors’ and disengaged investors’ retirement savings is driven by something other than age or income.

Two factors that differentiate engaged investors

To explore what might drive this difference, I investigated whether there were significant differences in attitude and disposition between engaged and disengaged investors. I found two important differences:

  1. Planning horizons: Engaged investors tend to have longer financial planning horizons – they prioritize the long-term–more than five years out–when they plan their finances. Disengaged investors, meanwhile, appear to be much more preoccupied with the short term and respond that they prioritize the next few months to a year. 
  2. Risk: Engaged investors expressed a stronger appetite for taking on financial risk than disengaged investors did. I found that over 60% of engaged investors reported feeling comfortable taking “above average risks” or “substantial risks” to achieve above average returns or substantial returns, respectively, compared to less than 25% of disengaged investors who reported the same. Shockingly, 27% of disengaged investors reported being unwilling to take any risks at all. 

Helping investors make better decisions

In my analysis, I find that most investors are disengaged—their only exposure to the market comes through tax-privileged retirement accounts—and do not seek out other investing opportunities. This deeper dive into different types of investors is enlightening, as it helps paint a more complete picture of who investors are, and how they approach their finances. Specifically, I find that disengaged investors often have short planning horizons and often prefer to take on little to no risk in the market.

It’s clear that some investors could benefit from taking a longer view of their finances, and from taking on more risk to help them achieve their financial goals (this is particularly true for younger workers, who are best-positioned to weather market downturns). Knowing these biases and tendencies, advisors and planners can help disengaged investors achieve better outcomes.

Download the full paper “It’s Time to Redefine ‘Investor’: How Looking Beyond Investing Stereotypes Can Drive Long-Term Success.”

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