Investor Constraints

In addition to attitude toward risk, an investor’s investment strategy will be affected by various constraints. We discuss five of the most common and important constraints next.
RESOURCES
Probably the most obvious constraint, and the one to which many students can most easily relate, is resources. Obviously, if you have no money, you cannot invest at all! Beyond that, certain types of investments and investment strategies either explicitly or effectively have minimum requirements. For example, a margin account must normally have a minimum of $2,000 when it is established.
What is the minimum resource level needed? It depends on the investment strategy, and there is no precise answer. Through mutual funds, investments in the stock market can be made for as little as $500 to start, with subsequent investments as small as $100. However, since there are frequently minimum commission levels, account fees, and other costs associated with buying and selling securities, an investor interested in actively trading on her own would probably need more like $5,000 to $50,000.

HORIZON

The investment horizon refers to the planned life of the investment. For example, individuals frequently save for retirement,.where the investment horizon can be very long depending on your age. On the other hand, you might be saving to buy a house in the near future, implying a relatively short horizon.
It is true that stocks outperformed the other investments in the long run, but there were shorter periods over which they did much worse. Consequently, if you have to pay tuition in 30 days, stocks are probably not the best investment for that money. Thus, in thinking about the riskiness of an investment, one important consideration is when the money will be needed.

SPECIAL CIRCUMSTANCES
Beyond the general constraints we have discussed, essentially everyone will have some special or unique requirements or opportunities. For example, many companies will match certain types of investments made by employees on a dollar-for-dollar basis (typically up to some maximum per year). In other words, you double your money immediately with complete certainty. Since it is difficult to envision any other investment with such a favorable payoff, such an
opportunity should probably be taken even though there may be some undesirable liquidity, tax, or horizon considerations.
A list of possible special circumstances would be essentially endless, so we make no attempt to produce one here. Just to give a few examples, however, the number of dependents and their needs will vary from investor to investor, and the need to provide for dependents will be an important constraint. Some investors want to only invest in companies whose products and activities they consider to be socially or politically suitable, and some investors want to invest primarily in their own community or state. Finally, some investors, such as corporate insiders, face regulatory and legal restrictions on their investing, and others, such as political office-holders, may have to avoid (or at least ethically should avoid) some types of investments out of concern for conflicts of interest.