Feb 27th, 2014 0 Comment

A persons personality and how it can influence investment decision-making is a big factor in the risk/reward equation.

Over time, equities have fared quite well in terms of total returns. However, that doesnt necessarily mean every investor should purchase or be invested in equities. Along the same lines, many junk bonds have the potential to deliver sizable incomes to their holders, but there are people who should never have junk bonds in their portfolios. So how can investors determine what types of investments are right for them?

An individuals resources or funds available may dictate what type of investment he or she should make. For example, some mutual funds require a $2,500 initial deposit. Similarly, a persons ability to sustain a loss may affect the types of securities he or she chooses. So, options and futures might not be sensible investments for an individual with limited resources or for someone facing retirement. Theres no point in wiping out your whole nest egg in one fell swoop, right?

However, these arent the only considerations when choosing which investments to add to your portfolio. A persons personality and how it can influence investment decision-making is actually a bigger factor in the risk/reward equation than purchasing power. Lets take a look at how your personality can shape your investing prowess, and how trusting your instincts can often lead you to the best decision.

How Personality Factors in

The ups and downs of the market have the potential to be stomach-churning to say the least, and to throw in a rocky or tumultuous market will only make things more nauseating. After all, what good is making money if you cant sleep at night? Buying investments that fit your mindset and personality is key.

So, how do you go about determining what type of investment fits your personality?

One way is to consider the characteristics of the various types of investments that are available to you, and then determine which characteristics suits you best. Lets take a look at four of the most common investments. By looking at the characteristics, you can get a sense of whether they will make you shiver with anticipation or fear.

Note: Remember, that you can find high risk, high excitement investments and low risk, low excitement investments in almost every category, but for the average investor with the average investments, these rules generally apply.

1. Stocks (High Risk, High Excitement)

Although these can be volatile, generally they are considered less so than options and futures contracts. Historically speaking, stocks have a strong track record of creating large increases or large decreases for individual investments. A quick look at a chart reveals that in spite of several recessions, a World War and other national and international crisis situations, the ASX Average has risen over time, and markedly. (Of course, the path wasnt straight up, and future performance is never guaranteed.) Those that jumped on the ASX and held on through the rough patches got an exciting reward for their passion.

As such, stocks are an attractive investment to investors who are willing to accept risk and who have the patience to hold an investment during periods of volatility.

Those with a somewhat conservative personality might be attracted to stocks in some circumstances too. Large corporations with a long operating history and that pay consistent dividends often attract these risk-averse investors.

The Animal Instinct in You

If you start to add shorting into your stock portfolio to ramp up the excitement, you might identify more with the bear investor. This animal enjoys a pessimistic view of the market, and can make money on the downturn of the market. Risk and market turmoil does not turn off this animal. However, if youre investing in long-term value stocks and youre expecting an even return over time, then you have a bull investor attitude. These bull investors make money on the optimistic hope that their investments will be worth more as the market rises, which may not always be the case, and that adds to the excitement of these investments.

2. Bonds (Low Risk, Low Excitement)

These investments are known for their consistency. Large swings in price have been known to occur as interest rates fluctuate or during downturns in the health of the issuer, but they are not the norm.

Bonds have a place in the portfolios of various types of investors. After all, the income that bonds kick off can be an attractive feature that might help pick up the slack of other under-performing holdings. That said, many people who are attracted to debt or make it a substantial portion of their portfolios are more risk-averse than their stock-holding or option-buying counterparts. A bond investor may also be a little more even-keeled in terms of demeanor in that they may not be looking to make a killing in the market, but to merely generate an attractive rate of return.

The Animal Instinct in You

The problem with investing only in bonds is that you run the chance of earning less than inflation over time and turning into an investing ostrich, scared of the market at every turn and hiding your head in the sand to avoid market news.