Thursday, 7 May 2015
Money doesn't have feelings, but people do. You may be naturally cautious — or a bit of a thrill-seeker.
You may be a born shopper — or you might not care much for acquiring "stuff." Either way, your preferences, expectations and needs — in short, your personality — inevitably influence your investment decisions.
To find out your investing personality, start by asking yourself these four questions:
High-risk investments offer the potential for higher returns — and bigger losses. Are you comfortable taking on risk if it could mean earning more money faster? Or would you feel panicked if the markets suddenly went haywire?
Do you have very ambitious, long-term financial goals? If so, that might require high-return investments. If you're not comfortable with risk, then you might need to adjust your expectations of, say, retiring at age 55.
Is this pot of money going toward an immediate goal, such as a home renovation, or is it for a long-term goal, like saving for retirement? If it is the former, you'll need steady, secure investments that may have low or minimal returns; but you'll be guaranteed that you won't lose the principal when you need it. If you are investing for the long term, you can take on greater risk.
Do you plan to withdraw some or all of the funds in the short-term? Or would you just "feel better" if you knew you had the option to withdraw money — should it be absolutely necessary? Either way, you'd need to make sure the funds are invested in low-risk, secure products.
Knowing the answers to these questions will help you figure out your investment personality.
You may need to use the money in the near future or may just be unable to tolerate risk.
For ultra conservative investors, some advisors might recommend savings accounts, certificates of deposit, short-term government-issued bonds, and fixed annuities. Remember to prepare for inflation — the cash you spend today won't buy as much in 10 years, so you'll need more cash to live later than you need today.
You want your assets to grow but you aren't comfortable taking on large risks. You are willing to accept returns that are a little lower for the security of less risk.
For moderately conservative investors, some advisors might recommend a mix of stocks and bonds, with most of the portfolio invested in bonds. If you realize that you may lose money occasionally, your conservatively invested funds can perform better over time than if they were sitting in the bank.
A middle-of-the-road, balanced investor, you want to take advantage of the high returns available through riskier investing, but you don't want to get too risky.
For moderate, or balanced, investors, some advisors might recommend a mixture of stocks and bonds distributed about 50/50. Those who want a little more or less risk can adjust the amount of stocks to more or less than half the portfolio. The bonds help cushion the ups and downs of the stock market and the stocks allow for greater growth over time.
You believe taking risks in the stock market will result in rewards and are willing to ride it out. The moderately aggressive investor often puts most (say, 70 percent to 80 percent) of his or her money in the stock market, with the rest in bonds. Your portfolio likely will perform better when you can leave the money in the market, even during downturns, and wait for it to rise again.
You believe that over time, the stock market will go up. You are willing to take the risks of ups and downs in the stock market, because you believe that's where the most money can be made. Aggressive investors tend to invest heavily in the stock market, through individual stocks, options, ETFs, or mutual funds. Many advisors say that this strategy works best for people who will not need their money for many years and can allow their investments to ride the ups and downs of the market.
Understanding your investing personality will help you develop a financial plan that meets your goals and fits your temperament.
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