Risk is a natural part of investing. Investors need to find their comfort level and build their portfolios and expectations accordingly. The more conservative your investments, the steadier your returns will be, while a portfolio that’s more aggressive would experience more of a roller coaster effect, and likely have higher returns but potentially lower lows. This is known as the risk-reward tradeoff.
1. The Conservative Investor
Typically this investor has a risk tolerance that is low. They are willing to give up potentially high returns for more stable returns, and consequently understand that they are unlikely to experience dips that they could not stomach. Often people choose a more conservative portfolio when their time horizon is relatively short. They invest in assets that are not intended to provide major growth and desire for steady returns.
2. The Balanced Investor
This investor type values reducing risks and enhancing returns equally, and are willing to accept modest risks to seek higher long-term returns. Typically investing in a mix of stocks and bonds, with an investing horizon around medium to long-term to allow the compounding of their investments to grow overtime.
3. The Aggressive Investor
An Aggressive investor values maximizing returns and is willing to accept higher risk, they are not afraid of market fluctuations. People who choose an aggressive portfolio require a longer time horizon in order to have ample time to accommodate for market dips. This is ideal for someone who is just starting out and is not as worried about losing their principal amount invested. Typically concentrating on equity investments such as stocks.