Investing is a risky business. Identifying your risk profile and investing accordingly is key to successful investing. When investing in a volatile stock market, a cautious investor would have sleepless nights. It's important to know the kind of investor he or she is before you start investing. Your investment profile will define the type of investor you are. Various factors are at stake, such as your age, financial position, investment objectives and risk-taking capabilities.
Ziad K Abdelnour, whose 20-year career in Wall Street consulting and investing in privately held companies explains the importance of assessing the risk appetite before investing. “Essentially, when it comes to investing, there are 3 different types of individuals: conservative, risk-taking, and realistic. Your outcomes will vary depending on the route you take. Inherently, some mindsets are more effective than others, but that doesn't mean you can't make your strategy work for you.” says Ziad. The main thing is to know which group you fall into and tailor your investment strategy to suit your needs. There is no clear formula to succeed on the stock market, but knowing the role that your attitude plays will help you make wiser choices.
Which type of investor are you?
The Low-Risk Conservative Investor
Someone who wants his money to expand but does not want to risk his main investment is a conservative investor. Conservative investors prefer financial products, like conservative mutual funds and bonds, that do not fluctuate much in value. If investment capital is needed soon or when the economy is in the middle of a serious decline, this is a wise investment plan. However, during periods of economic prosperity, conservative investors miss out on exponential growth. People who are nearing retirement or who do not have much money to play with may be more likely to stick to low-risk investments. There was a time when, through savings accounts, you could conservatively grow your money, but in recent years, low-interest rates have seen investors looking for other alternatives. What if you have a low-risk threshold and the stock market doesn't feel very comfortable? Bonds and conservative mutual funds are a happy medium between stock and investment. They offer more stability and predictability than other investments, generally speaking, although no investment is 100% risk-free.
The Balanced Medium Risk Real Investor
A medium-risk investor is a slightly more risky investor who can take on a bit of choppiness in the value of his portfolio. The portfolio will be slightly volatile here, but the returns may be higher as well. A mix of shares and bonds from stable companies includes the assets in a balanced portfolio. In order to deliver better capital growth, a small proportion of the portfolio may even be invested in riskier assets. The purpose of a balanced portfolio is to invest approximately 50% in growth assets (e.g. equity and assets) and the remainder in protection assets (eg cash and fixed income). The 50 % figure is a general benchmark; actual allocations over time will vary as market dynamics shift and investment managers take opportunities to improve returns. This portfolio fits investors who want a modest degree of capital stability but are capable of tolerating moderate investment value volatility in exchange for potential investment performance. Such a portfolio is suitable for investors having a medium-term investment time frame. They're not quick to jump blindly into making an investment, but just because of a slight decline, they're not going to jump out either. They know that timing is important and that's why they tend to outperform the first two groups in the long term.
The High-Risk Aggressive Investor
As the name suggests, an aggressive investor is willing to expose his portfolio to high risk and greater volatility for the sake of capital growth. These investors are prepared not only to be exposed to volatile capital markets but also to invest in small and unknown companies that are expected to perform well. In addition, they are also ready to invest in leveraged derivative products. This type of investment is not for those with weak hearts, and certainly not for those with limited capital. These people tend to play an in and out game in the market. They come in during times like the 1990s and now, especially when it comes to Tech stocks. They’ll cut their ties and get out during low periods such as 2008–2009, and early 2020 during the early stages of Covid. Aggressive investors might rejoice, instead of becoming concerned when the market goes down. Market downturns may be a chance for them to purchase anything at a bargain price (with the assumption that prices will eventually move back up). "Aggressive investors, however, need to be aware of the old saying "do not try to catch a falling knife". It's hard to know when things are about to fall.years and think it will always be easy to make such money. This isn’t always the case and can put them at risk of suffering from huge losses.
In conclusion, risk and return are directly proportional. The lower the risk, the lower the return, and the greater the risk, the greater the return. But by diversifying its portfolio, risk can be mitigated even by aggressive investors. By investing in a wide range of unrelated stocks, risk can be mitigated to some extent, but can not be eliminated. It is essential to have identified yourself as the type of investor before selecting the instrument you are going to invest in to achieve your goal. To reach your goal, an equity investment may require less capital and less time, but it may not be the best thing for you. If the difference in returns for the same capital is theoretically estimated for different groups of assets, one might be tempted to identify oneself as an aggressive investor. Identification of the type of investor you are, therefore, should be sunk in before you move to pick resources to achieve your target.