8 Personality Traits That Determine Investment Risk Tolerance

Investing is all about taking risks. For some, they are calculated risks that are based on advice from professionals, a deep knowledge of the economy and the markets, and an understanding of their own goals. For others, taking big risks for the hope of big rewards is the name of the game and these investors stand to gain a lot — but can also lose it all.

Finding out where you fall on the spectrum often has a lot to do with your unique personality. Here are eight personality traits that may have a big effect on your investment behavior.

Openness

If you’re open to advice and new experiences, you’re more likely to listen to a professional advisor when they encourage you to take a risk.

Those who have high levels of openness are curious and imaginative, and they enjoy thinking about how their life would change if one of their risks paid off.

Though those who are open won’t take ill-advised risks, they will step out of their comfort zone when it comes to their portfolio.

Cautiousness

If you have a cautious personality, you make many decisions based on fear and are quite sensitive to loss. Those who are high in caution don’t like taking risks — especially if they aren’t extremely well calculated — and are some of the lowest on the risk tolerance scale.

This can cause their portfolios to underperform, but they rarely take big losses when the market takes a downturn.

Analytical Nature

Analytical types are those most likely to go into financial fields such as accounting, banking, and yes — financial planning. They’re also the most likely to leave emotion out of the investment process and only take calculated risks.

Those who are highly analytical can be very successful investors because they are disciplined, but they’re unlikely to take big risks and rarely see lucrative rewards.

Optimism

Fear can easily take center stage for the pessimistic investor, causing him to avoid risks and stick with what is tried and true.

Optimists, on the other hand, tend to have an ‘everything will all work out in the end’ mentality and are much more likely to jump into risky investments.

Though an optimist will likely worry less about their investments, the pessimist’s need to plan everything out usually puts them in a better financial position at the end of the day.

Extroversion

The sociable and outgoing extrovert tends to have a higher tolerance for risk than his introverted peers.

While many extroverts possess a thrill-seeking gene that keeps them always searching for that next fix, introverts are more willing to take things slow and steady and wait for the bigger reward.

An introvert will take risks, but they are usually well thought-out and based on research and tend to pan out more often than those taken by extroverts.

Spontaneity

Spontaneous people love to make decisions and they tend to make them often — and based on little evidence, research, or sound advice.

Spontaneous people are all about what makes them feel good and they tend to second-guess themselves and those experts who try to lead them down the right path.

This puts them very high on the risk tolerance spectrum as they’re willing to dive into anything if they think it’s a good idea at the time.

Agreeableness

Those who are agreeable are kind, sympathetic, and eager to help. Agreeable types listen to everything their advisor has to say and want to make him feel good by taking his advice whenever possible.

That means that their level of risk tolerance often dovetails with their advisor’s. They’re unlikely to jump into a risky investment on their own, but will likely do so if someone nudges them in that direction.

Neuroticism

Inclined to worry and be temperamental, those who are highly neurotic are attracted to risk while at the same time find it disturbing. This leads to unpredictable behavior that can involve taking wild risks one moment and then retreating into extreme caution the next. Neurotic investors often buy risky stocks and then quickly sell them — only to buy more risky stocks soon after. Those who have neurotic personalities can present quite a challenge for financial advisors and often find themselves in financial crises.

Understanding your risk tolerance and how it relates to your personality will help you relate to your financial advisor and make changes when necessary. When you get to know yourself and your tendencies more in-depth, you can live a more fulfilled and successful life.