What Are Factors Affecting Individual Choices for Investing Money?

by Cynthia Myers

Your investment decisions won’t be the same as your brother’s or your next-door-neighbor's. A number of factors influence the choices you make when you're deciding how to invest your money. Some of these choices, such as how much money to invest, depend on external factors. But other choices, such as the amount of risk you'll assume, relate to your internal psychology. Understanding the factors affecting individual choices for investing money may help you make better investment decisions.

Goals

Some people invest for college, some to fund retirement and others as a means of offsetting their tax burden or to increase wealth. Your investment goals will influence your investment choices. If your primary purpose is to minimize your tax burden, you’ll focus on investments in which the income is tax-free or tax-deferred. If you’re investing for college or retirement, you may choose investments that offer those benefits.

Age

Younger people have more time to recover from market fluctuations, so they may generally assume investments with a higher risk. People who are at or near retirement age might depend on their investments to support them during their retirement years, so they tend to desire less risky investments to preserve their capital. People who need to draw income from their investments right away choose different investments than those who can let the income sit untouched for years.

Income

Some investments, such as some mutual funds, stocks and bonds, require a larger outlay of cash up front. People who don’t have as much discretionary income may be limited in the investments they can make. People with less disposable income may avoid investments that require paying transaction fees.

Risk Aversion

Some people are more comfortable with risk than others. For some people, the possibility of losing money makes investments exciting. They accept that losses are a possibility, and they feel comfortable accepting a higher degree of risk for the chance of a bigger payoff in the long run. Other people can’t tolerate risk at all. These people stick to safer investments with low degrees of risk.

Knowledge

A 2010 report issued by the U.S. Social Security Administration Office of Retirement and Disability Policy reported that people’s investment choices are influenced by the amount of information they receive about investing and their personal financial literacy. A person who is uneducated about investing may be afraid to invest at all, or he may stick to the limited areas with which he is already familiar.

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