Your investing personality
Step 2 to investing is knowing what kind of investor you are. This is called your investing personality or investor profile.
4 questions to ask yourself
1. How much risk can you tolerate?
With higher-risk investments, there’s a greater chance you could lose some or all of your money. But higher-risk investments also have the potential to grow your money faster. Ask yourself if you’re comfortable taking on more risk if it means greater returns. Or would you be more comfortable making less and knowing your money will be there when you need it?
Take this quiz
to see how comfortable you are with risk.
2. How much do you expect to make on your investments?
Figure out how much of a return you’ll need to make on your investments to reach your financial goals. Keep in mind that to get a higher return, you often have to take more risk. If meeting your expected return means taking on more risk than you’re comfortable with, you may need to adjust your goals.
3. How long do you plan to invest for?
Your investment time horizon is the amount of time it will take you to meet your goals. Your time horizon could be short term, like saving for a vacation in 6 months. Or it could be long term, like saving for retirement in 20 years. Your time horizon is a key factor in choosing investments. For example, if you’re investing for the short term, you may want to choose investments that guarantee your return, so your money is there when you need it. If you’re investing for the long term, you may choose to take more risk with your investments.
4. Do you need quick access to your money?
Liquidity is a way to describe how easy it is to get your money back from an investment. Cash and bank accounts are very liquid. You can usually get your money right away and get it easily, but the returns are low. Investments that are less liquid may offer a higher potential return, but also may come with more risk.