What Kind of Investor Are You?

Discovering what kind of investor you are can help you choose the right investment mix. There are multiple factors to consider:

Your financial situation. Understanding both your short- and long-term financial needs will help you choose the best approach to help you meet your retirement investment goals.

Your time horizon. The longer you have to invest, the better equipped you are to ride out the short-term ups and downs in the stock market, and the more aggressive your investment strategy can be. But, if you’re nearing retirement, you may need the relatively lower risk of bonds and short-term investments.

Your risk tolerance. All investments involve some risk. Before you decide on your risk tolerance level, there are two types of risk to think about:

• The risk that an investment will not generate the return you’d hoped for is called investment risk. For example, if you buy stock in a company for $20 a share, and a week later, the price of the stock dropped to $18, you have experienced investment risk. Your investment is worth less than it was a week ago. The potential reward for taking this risk is that the stock’s value may have gone up instead of down.

• The risk that inflation will eat away at the value of your savings is called inflation risk. As inflation increases over time, the dollar buys less.

Stocks tend to involve greater investment risk and less inflation risk. Bonds and short-term investments offer less investment risk, but greater inflation risk. Ultimately, your comfort level with each type of risk will help determine which investment mix is right for you.