Investor personality – essentially, how much you can tolerate risk – is critical in determining your asset allocation when establishing your portfolio. But this factor requires ongoing attention because it can change over time.
Here are three examples of how your investor personality can affect your investment management decisions:
You receive an inheritance
Imagine that two people with the same investment objective and time horizon receive a sizable inheritance of equal amounts. If they don’t have the same risk tolerance, they may change their existing portfolios in entirely different ways. If one is a more conservative investor, they might decrease risk by allocating even more assets to fixed income, since they can now accept lower returns. If the other is a more aggressive investor, they might view their inheritance as a safety net and thus allocate more assets to higher-risk equities to pursue greater returns.
You’ve experienced one or more market cycles
If you have lived through market declines and recoveries, you may have a better understanding of your risk tolerance. An investor who has suffered a distressing level of anxiety while fund values were down may know now to select conservative investments. On the other hand, an investor who has been comfortable with market lows might be fine with increasing their equity holdings during such times.
You are approaching retirement or have already retired
Transitioning from wealth accumulation to wealth preservation involves a new slate of investment products and strategies. A conservative individual may focus on wealth preservation and favour investment plans offering guaranteed income for life. A more aggressive investor may maintain a focus on equities and draw tax-advantaged income from those holdings with a systematic withdrawal plan.
Talk to your advisor to find investment solutions that work with your risk tolerance. Also, you can use the investor profile calculator to get an idea of your investor personality.