New investors today choose from a wide selection of investment options through financial institutions and online investment firms. Whether you prefer to make your investment decisions on your own or with the help of a professional, there are several factors to consider when selecting options for your portfolio. Think about each factor carefully to ensure you make the investment choices that best suit your needs and plans.
Time Horizon
One of the most important factors for investors when choosing investments is how long their money will remain invested. Investors with short time horizons usually prefer conservative investments with less chance of going down in value to make sure their money is available when they need it. Short time horizon investment goals such as saving for a down-payment may call for a low-risk and low-return term deposit. 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 should they occur. A retirement plan for someone in her twenties has a longer time horizon and may be better suited for investments with higher potential returns and risk.
Risk Tolerance
Risk tolerance refers to how comfortable an investor would be should 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.
Investment Knowledge
An investor's experience and knowledge are important factors in 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.
Income and Net Worth
An individual's income and net worth are also important factors in making investment choices. Purchasing certain equity investments, such as stock, often requires thousands of dollars of capital, while you can purchase mutual funds with a few hundred dollars. New investment plans for young investors with limited incomes often are set up with contributions of less than $100 a month directed to a mutual fund composed of stocks and bonds of many different issuers. Bonds, term deposits and guaranteed investment certificates usually have a minimum purchase amount of at least $1,000. 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.
