Individuals make investment choices based on a combination of needs and wants that often correspond to their age and how much time they have before they retire. While some investors manage their money for a more short-term payoff, many others invest to make sure they have a comfortable retirement. Understanding the motivations different people have for investing will help you make better financial decisions as you build your portfolio.
Read More: How Does Investing Work?
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Amount of Risk
One of the main factors that influence investors is the risk factor. Higher risk can lead to higher returns, while lower risk provides more safety. Younger people who are investing to build a retirement nest egg are often more willing to take risks because if they fail, they have decades to recover. This means a younger person's portfolio might have more stocks than bonds, or more money in a mutual fund or money market than an individual retirement account.
Read More: Investing in Your 20s
Short-Term vs. Long-Term Gains
One key factor affecting individual choices for investing is whether or not you want to use your gains this year or in the future – for retirement, for example. For those who want returns now, higher-risk investments are their trades of choice. For people who are focused on saving their investment gains until their retirement 20, 30 or 40 years from now, long-term investing is their goal.
Some people have mid-range goals. For example, one couple in their early 20s who want to earn money they can use toward a mortgage down payment in another five to 10 years might be willing to invest in higher-risk products that provide a better return. Another couple that's the same age with the same goal might want a more conservative investment because they will be able to put more toward their savings goal each year.
Read More: Investing in Your 30s
Different Tax Strategies
High earners often look for ways to reduce their tax burden. Their investment strategies reflect this. For example, they might put more money into a traditional IRA until a certain age, at which point it becomes more tax-advantaged to roll that over into a Roth IRA. Investors who don't need their gains each year can keep their money in their portfolios and reinvest it rather than taking the money out and spending it. This reduces their capital gains taxes.
Investing for Retirement
People who are looking to improve their lifestyle through annual stock market gains have a different mindset than those looking to build savings for retirement. Many people interested in safe retirement investments prefer to take advantage of their company's 401(k) match. Even though their annual gain might be less than they would make with other investments (due to their 401(k) fees), the "free" money from their employer and safe return over the course of decades meets their personal investing goals.
Type of Employment
When you work as an employee, your employer pays half of your Social Security tax each year. If you are self-employed, you must pay the entire amount. This means you might have less to invest in the market and will have to depend more on your Social Security after you retire. In addition, self-employed people can't take advantage of an employer 401(k) match unless they set up a corporation and work with a financial professional to be able to do this.