Everyone has different financial goals with differing priorities, and so it’s natural that individual investment choices will vary from person to person depending on their goals, risk tolerance and individual personality. However, no matter what your individual goals are, there are certain common factors that affect everyone’s investment decisions.
Whether you make investment decisions on your own or rely on professional help, knowing the factors that affect your investment decision is essential to maximize your portfolio return.
Investment always starts with setting up goals. We need to be aware of our requirements before starting our investment journey. Whether you’re planning to invest in your retirement plan or your dream home or funding your child’s education or to simply to meet a future expense, you should be clear of your goals. You can set your goals as short-term ones or mid-term or long-term depending upon the length and requirement. This way you can streamline your investment choices accordingly to your goals.
How much risk can you tolerate in the long run?
Risk appetite refers to how comfortable an investor would be when the value of his investment decline significantly. Higher risk investments also have the potential for higher returns, while lower risk investments are more conservative and usually have lower returns. An investor with a higher risk tolerance is willing to take the chance of losing money for the possibility of a superior return on investment.
Thus, understanding the risk factor is one of the major keys for choosing an investment scheme. The risk tolerance may differ for every investor, being a personal characteristic. Our age and the emotional make-up also largely impact our ability to tolerate risks. Risk tolerance levels may differ for every part of your portfolio.
One of the most important factors for investors when choosing investments is how long their money will remain invested.
In general, the longer you have before you want to spend your money, the more aggressive you can be in investing it. Individual stocks, as well as mutual funds and exchange-traded funds that focus on stocks, can be a valuable component of a portfolio with a long-time horizon. By contrast, if you only have weeks or months before you’ll need your money back, bank savings accounts or certificates of deposit help avoid the risk of an ill-timed downturn in the stock market leaving you with an unexpected loss.
Thus, Investors with longer time frames to meet their goals may choose riskier investments, as there is a longer time for investments to recoup short-term losses if they occur and Investors with short time horizons may prefer conservative investments with less chance of going down in value to make sure their money is available when they need it.
Income level and Net worth
An individual’s income and net worth are also important factors in making investment choices. Investment requires you to put in your money in order to get returns and seek growth in your wealth. Our income levels define the amount of money we can invest in the market. Purchasing certain equity investments, such as stock, often requires Lakhs of Rupees as capital, while you can purchase mutual funds with a few thousand Rupees. New investment plans for young investors with limited incomes often are set up with less contributions per month directed to a mutual fund composed of stocks and bonds of many different issuers. Investors with larger amounts of capital have access to a wider range of investment choices, while new investors or those with a lower net worth have a limited selection.
It may also have an impact on our risk tolerance level.
Investor’s knowledge and experiences
An investor’s experience and knowledge are important factors in his/her investment choices. Novice investors may choose to rely on the advice of family, friends or an investment adviser when selecting investments. More experienced investors often choose their own investments. Understanding the risks involved and potential investment outcomes helps them decide if stocks, bonds or other investments suit their portfolio.
Thus, an experienced investor takes faster and smoother investment decisions without too much time.
Depending on your return expectation, you can choose the right investment avenue to meet your desired goal. Each investment has its associated risk and expected return and being an investor, you would know that there is a trade-off between risk and return, i.e. higher the expected return, higher would be the associated risk.
Need for Liquidity
This is about the ease with which you can transform your assets into cash, at or near to the latest fair market value. One cannot discount the fact that there may arise some unforeseeable situations where you will need an influx of cash on an urgent basis. We all have heard of the phenomenon that we should keep an emergency fund aside for this matter. But in times of need, where emergency funds do not suffice you may have to dip hands into your investment and liquidate them. Liquidity refers to the degree to which you can convert the asset or security quickly into cash. The ability to liquidate your assets is one of the major influencers for anyone making investment choices. There are plenty of assets that have high liquidity like stocks, fixed deposits, liquid funds and more where people are investing into. It’s not that you should go for high liquidity investment only but the ability to quickly sell them off in times of need is a real deal-breaker.
The Tax liability often impacts our income and reduces our investable surplus. And with lesser investible surplus, we will obviously have to settle for a lesser return. Taxation plays a prominent influencing factor when it comes to our investment decisions. But it’s not all dull and gloom for an investor as there are various investment schemes that help to reduce the tax liability. The options like ELSS and other hosts of Sec 80CC and 80CCD related investments have become a preferred choice for people who want to invest and avail tax benefits. Thus, gives you the benefit of increasing your wealth while reducing your taxes.
Government and Political Factors
Fiscal policy, regulations and political stability also affect the investment decisions. Large fiscal deficits reduce government flexibility and may result in higher borrowing costs for businesses. An arduous regulatory approval process can hamper the corporate investments. Political stability creates investor and business confidence because there is more visibility into possible investment returns. Investors tend to avoid countries that change governments frequently or have civil strife.
According to some studies, people tend to develop a strong liking for certain investments just because they are familiar with them. This makes them feel as if they have more knowledge or experience about such investment products and thus, they gain a sense of comfort and security.
The average investor’s proximity bias grows stronger as the longer the investor has lived within the same community. It gets stronger for investors who have never moved from their birthplace area. Local investors have neither access to superior information nor any advantage in interpreting the existing information.
There are a lot more factors that goes into making investment decisions and it depends on your personal profile, family history, number of dependants, loans, etc. Considering the various factors while making investment decisions can help you build a solid investment portfolio that best suits your needs and temperament.
Dilzer Consultants Pvt Ltd