Helping Create Freedom For Life
· Site Map
What Is Your Investment Style?
Knowing what your risk tolerance and investment style are will help you to choose investments more wisely. While there are many different types of investments that you can make, there are basically three main specific investment styles – and those three styles tie in with your risk tolerance. These styles are conservative, moderate, and aggressive.
If you find that you have a low tolerance for risk, your investment style will most likely be conservative or perhaps moderate. But if you have a high tolerance for risk you will most likely be a moderate or aggressive investor. At the same time, your financial goals will also determine what style of investing you use.
If you are saving for retirement in your early twenties, you should use a more aggressive style of investing as you will have time to recover losses – but if you are trying to get together the funds to buy a home in the next year or two, you would want to use a conservative or moderate style. You will want to know that the money is secure for this short-term goal.
Conservative investors want to preserve their initial investment. In other words, if they invest $5000 they want to be sure that they will get their initial $5000 back. This type of investor usually invests in bonds and short term money market accounts. An interest earning savings account is very common for conservative investors.
A moderate investor usually invests much like a conservative investor, but will use a portion of their investment funds for higher risk investments. Many moderate investors invest 50% of their investment funds in safe or conservative investments, and invest the remainder in riskier investments. This approach is often referred to a ‘balanced’ investor.
An aggressive investor is willing to take risks that other investors won’t take. They invest higher amounts of money in riskier ventures in the hopes of achieving larger returns – either over time or in a short amount of time. Aggressive investors often have all or most of their investment funds tied up in the stock market.
Again, determining what style of investing you will use will be determined by your financial goals and your risk tolerance. No matter what type of investing you do, however, you should carefully research that investment. Never invest without having all of the facts!
Determine Your Risk Tolerance
Each individual has a risk tolerance that should not be ignored. Any good financial planner knows this, and should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance.
Determining your risk tolerance involves several different things. First, you need to establish how much money you have to invest, and what your investment and financial goals are.
For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you need to have a high risk tolerance – because you will need to do some aggressive – risky – investing in order to reach your financial goal.
On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance may be low. You can afford to watch your money grow slowly over time. But you will also have time to recover from losses.
Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good financial planner should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.
Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together.