So, you’re ready to start investing… but first, what is your risk tolerance level? WHAT TYPE OF INVESTOR ARE YOU? Understanding your risk tolerance level is one of the most important factors in investing. This will shape your investment strategy and become a guide to building your portfolio. Risk tolerance is the level of risk you are willing to accept. We all get excited about the gains, but can you handle the losses? The three risk tolerance/investor types:
A conservative investor is all about protecting his/her principal (original investment) by minimizing risk. This investor “plays it safe”, similar to the granny who likes to stuff her savings in her mattress as opposed to trusting the bank. A conservative investor is okay with smaller gains between 0-5% because they are taking a smaller level of risk. These investors have likely already built their portfolio to ensure a comfortable and steady income stream or they are just scared to lose money. A conservative investor has a portfolio comprised of:
- Regular bank savings account
- Certificate of deposit (CDs)
- Government bonds (municipal, treasury, etc.)
- Annuities
A moderate investor focuses on diversifying his/her portfolio in a way that limits risk while pursuing stronger returns. Think of this as a hybrid between conservative and aggressive. A moderate investor may have an expectation of between 5-20% annual return. Moderate is typically the most recommended portfolio for most investors:
- Equities (focusing on diversification)
- Mutual funds
- Exchange-traded Funds (ETFs)
- Individual bonds
An aggressive investor understands “the greater the risk, the greater the return”… similar to that one uncle willing to risk it all at the casino to triple his paycheck. These investors are able to handle the unpredictable shifts that Wall Street brings. By accepting less diversification in comparison to moderate, this investor is susceptible to far greater levels of risk. An aggressive investor typically looks for returns greater than 20%. This investor’s portfolio could oftentimes include:
- Equities (individual stocks)
- Cryptocurrencies (Note: though there have been many success stories, be careful with cryptocurrencies as these are not regulated).
- Options and other special contracts
Though some portfolios may include the same type of investments (bonds, stocks, etc), they are weighed differently depending upon your investment strategy. Overall, it is typically advised to be more aggressive in your earlier stages of life. The closer an investor gets to the age of retirement, the more conservative the investor should become. Regardless of your investment type, investing in the stock market is a good strategy to provide long-term wealth. Once you have an understanding of what category you may fall under, consult a financial advisor on ways to incorporate your preferred strategy into your respective financial plans.
