Aggressive, conservative, balanced. All common terms you hear people mention when describing the type of investor they are, but what do they really mean? How does one determine if they are aggressive or conservative? Well there are a few things to consider before determining the type of investor you are.
The length of time that you plan for the money to be invested plays a large role in what type of investor you are. If you need to access the money in a very short amount of time, chances are that taking a lot of risk in most cases is not advisable. Simply because, if you are taking a big risk with your investment and things go south, chances are you are not going to have enough time to recoup your losses prior to when you need to access the investment. Conversely, if you have an extended period of time before you would ever need to access your investment, you can typically stand to take on a bit more risk. Lets look at it this way; when you’re in college people tell you to have the time of your life, live a little, make some mistakes. However, in your late thirties you might need to be a little more cautious about your actions as you aren’t getting any younger. You might not heal as fast if you do a back flip off of a trampoline and lose your footing at the end. For the record, I would not recommend doing that at any age. So a note to the 20-somethings out there, take advantage of your time and invest while you are young, not only will compound interest be your best friend, but you may also be able to capitalize on greater returns due to the fact that you can afford to take a little more risk at this time.
Why are you investing the money in the first place? is it for a new house? College education? Retirement? Whatever your reason for investing, you will want to identify exactly why you are investing besides to get a better rate of return than the .000-nothing the bank is giving you on your savings or money market account. This is where the guard rails get a little more narrow. If you are simply building up an emergency fund, investments that require you to keep your money invested for a prolonged period of time is not going to be suitable for this goal. If the money’s for college education, you aren’t going to want to put it in an a retirement account like an IRA either. Even though it may be 18 years off, those accounts have specific restrictions on the money that goes into the account and how it is penalized or taxed if taken out prematurely. So determining your purpose for investing as you can now see, is key.
Lastly, taking big risk for big possible rewards may sound good on paper, but when its not monopoly money, it’s a different story. When investing, you have to realize that their is always a chance for loss. As an investor, you just need to understand and be ok with what that loss potential is. One way to get an idea of what your risk tolerance is would be to take a Risk Tolerance Assessment which will give you scenarios of loss or gain potential within a given investment. You will want to be truthful with yourself here because this will help you ultimately determine which investments may be suitable for you. Lofty returns may seem good on paper, but if you’re not prepared for what could happen if the investment does not go your way, you may want to reconsider.