Published: 25 Jun 2019
If leaping 30 metres into a gorge on a bungy cord is more likely to terrify than thrill you, that could be a clue to the type of investor you are.
It’s a generalisation, of course, but there’s a reasonable chance that if you’re a thrillseeker when it comes to physical activities, you’ll be looking for some similar risky business when it comes to investing.
Not that you’d want to lose your shirt in a high risk investment any more than you’d want that bungy cord to snap but, as a thrillseeker, you may be prepared to take a chance on a higher risk investment to snare a higher return.
At the other end of the spectrum are those who prefer not to take any risks — with their lives or their investments. They might like the idea of a higher return, but they’re not prepared to suffer financial loss.
“Ideally, everyone would like a high return/no risk investment, but they don’t really exist,” says Energy Super financial adviser Mark Rabius.
Optimist or pessimist?
Similarly, your mindset may determine how you approach your investment strategy.
“Optimists may cope better with market fluctuations, believing everything will be fine at the end of the day,” says Rabius.
“But pessimists, or those who’ve had a bad experience in the past with a drop in the market, may become apprehensive and less likely to take risks,” he explains.
While your personality invariably affects the types of investment decisions you make, it doesn’t mean there’s a good or a bad one when it comes to managing money. And, of course, there are many other factors you’ll probably take into account when deciding on an investment, such as the length of time you’d like to invest and any bad experiences you might have had with say, the sharemarket.
It can be useful, though, to understand your personal strengths and weaknesses and how they might limit your investment strategy.
Conservative or risk-taker?
For example, if you’re very conservative in life and how you handle your finances, you might believe that taking as little risk as possible will keep your investments safe. But, looking at the big picture, that approach may affect the potential returns on your portfolio over the long-term.
“You might be only getting a return of 2-3% per year when you need to be achieving something like 5% or more to provide the income you need. For them, the risk is not that they’re going to lose their investments, it’s that they’ll outlive their capital — the money will run out before they do,” says Rabius.
On the other hand, those chasing the highest return may lose more if the markets fall. Depending on their age and circumstances, this could leave them no time to recover and recoup these losses.
“Some people believe they can ‘beat’ the market or pick the next downturn, but that’s rarely the case and they’re in a risky area,” says Rabius.
So, what’s the answer? Understanding your own personality and your approach to risk and reward is a good start. And secondly, understanding how risk, reward and time works when it comes to investing. Generally speaking, the higher the risk, the higher the reward and invest what you can for the long-term to help smooth out the effects of market fluctuations.
A financial adviser can help you to come up with a strategy that matches your personality, and attitude to risk, with appropriate investments that aim to maximise your retirement income.