Investing Based on Your Personality

 

 

When it comes to investing, risk is everything.

If I told you that I had $1m invested in Bitcoin you’d probably think that I was crazy!  A maniac soon to be separated from his money.

But what if I followed this up with saying that I had a net worth of $100m? Having only 1% of my total (very hypothetical fortune) invested in a risky asset seems somewhat less risky.

Risk is very much an personal and emotional response. What one persona sees as being risky, another may see it as being conservative.

If you are the type of person that is worried about losing some of your money when investing you may be said to have a low risk appetite.

This means that you get nervous and little anxious at the thought of loosing even just a bit of your money.

Capital protection is important to you. Conversely, if you’re happy to ride the wave of big gains and big losses with the overall objection of a decent size pay off, you are what is known as having a big risk appetite.

Neither one is right or wrong, They are a personal preference and an emotional response.

If you are the type of person who fits into the conservative of low risk category you obviously want to invest in low risk assets.

This means that over the long run you generally won’t have the larger returns that the riskier asset classes can provide. But you will have piece of mind.

The investment structure of a conservative investor will mean that you will be invested in assets like cash and fixed interest. A smaller portion of your portfolio will have exposure to some property and shares but only the amount you are willing to see fluctuate.

A more aggressive investor is going to be exposed to domestic and international stocks. Shares listed on the stock exchange represent one of the riskier investment you can make. Your investment can literally go to $0 if the entire market crashes. This doesn’t happen with property or cash.

The charts below gives you an idea around the asset mix as well as the returns based on the different investment approaches.

                            

                          

 

 

Results from 1950-2016

 

Another way to determine your profile is your age. Generally speaking the younger you are the further right you want to be in the above chart.

That’s because you have longer for the market to recover if there Is a crash and your portfolio takes a hit. You don’t have this luxury if the stock market crashes 5 years before your retirement and most of your investment is in shares.

To give you a general idea , the stock market is expected to go backwards every 6 to 7 years. A 10 year window is reasonable time frame for investments to recover.

However, if you’re 25 years old and the thought of seeing your money go up and down or possibly loosing 50% in one year makes you nervous, be more conservative.

If an investment is making you anxious or lose sleep at night, it’s a good sign that you are invested too aggressively for your risk profile

 

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