Investing Risk Tolerance and Your Personality

Forex trading is a high risk/high reward endeavor and as such, it takes certain types of personalities to be able to accept these risks.

Investment advisors usually assess the capacity of an investor to take risks by taking into account their age, the size of their investment, when they plan to retire, their expected earnings in the future and their financial obligations. These are quantifiable factors that can be easily assessed and provides a  picture of their ability to take risks and how they formulate their forex trading strategy.

But the ability to take risks is quite different from their willingness to do so.

Willingness to take on risk is a complex issue and one that fully differentiates the individual investor from large institutions. We must realize that many of the investment products out there are made by institutions for institutions, and, therefore, does not take into account the human factor of willingness to take risks. This is the reason why personality typing is becoming a popular tool for those who want to enter high risk investment endeavors like forex trading.

So how does personality typing work? The first step in the process is to document the investor’s personal background. The investor is interviewed and asked about his life experiences, he is asked to describe his personality, and asked questions about his career and his plans for the future. His investment portfolio is also studied because it gives an insight into the investor’s willingness to take risks and whether or not he can be swayed by emotions when making investment decisions. Some assessment services have developed detailed proprietary questionnaires that not only help them with the process, it also standardizes the process as well.

After the investigation and interview, the results are calculated and then the investor is categorized into certain personality types.

The following are the broad personality types:

Lower risk

Cautious

Cautious investors are mostly ruled by their feelings. They are quite affected by losses. Their decision making process is usually influenced by their fears. They have difficulty in making proactive investment decisions are wary of advice from other people. Because of these factors, their portfolios are characterized by low turnover and are mostly about making safe investments. Elderly widows or retired teachers are usually part of this group.

Methodical

Methodical investors use disciplined trading strategies. Their investment decisions are grounded on facts. Because of this they will usually pore over the smallest of details. Their decisions are also products of investment research. They don’t have much use for emotions when making decisions. Because of their discipline they are also more likely to have a lower tolerance for risk. Architects and engineers are usually methodical investors.

Higher willingness for risk taking

Spontaneous

The spontaneous investor, like the cautious investor, also makes decisions based on their emotions and feelings. But unlike the cautious investor, they do this quite often. Being emotion-based, they will often second guess their own decisions and the advice given by other people. They are also more prone to follow investment trends and fads. Their portfolio is often peppered with higher turnovers and will have many risky investments. Trust fund kids or salespeople who earn by commission are usually spontaneous investors.

Individualist

Individualist investors base their decisions on facts and are not prone to second guess their investments. They are very independent thinkers and will have a lot of trust on the research they have made. They are more risk averse compared to other personality types. These types of investors are usually those who are self-made or are hard works. Business owners or those who are in upper management in large corporations are typically part of this group.