Identify Your Investment Personality
As an investor, you might find it helpful to determine your investment “personality”—that is, whether you’re conservative or aggressive. Let’s examine the characteristics of each and then you decide which profile fits you.
While no investment is absolutely guaranteed, conservative investors are more concerned with safety of principal and minimization of risk. They like to be reasonably sure their investments will be protected from sudden or long-term losses. Because the conservative investor desires substantially lower risk, he or she is usually willing to accept the potentially lower return that can be expected at this reduced level of risk tolerance.
On the other hand, the aggressive investor is primarily concerned with maximizing investment return and is willing to accept a higher degree of risk in order to obtain potentially higher returns. The aggressive investor avoids “locking up” too much money for long periods in fixed interest rate investments, preferring a more flexible investment strategy.
Even aggressive investors will differ in their levels of risk tolerance. Some will invest in aggressive mutual funds that place their money in the stocks of smaller, rapidly growing companies. Others might invest in the common stocks of minimally capitalized companies. Although willing to expose asset values to substantial declines in very adverse market conditions, the aggressive investor strives for greater potential return than that accepted at lower risk levels.
Crossing the Lines
Investment personalities are not “chiseled” in stone. While conservative or aggressive may describe your basic style, particular life circumstances and the length of your time horizon may affect your investment strategy.
For example, if a particular investment represents just a small percentage of your overall funds available for investment, a loss in that one investment will be far less damaging than if the investment represents a significant portion of your investment pool. When looked at in this light, even predominantly cautious investors can “afford” to be more aggressive occasionally.
Also, consider an aggressive investor (a hypothetical case) who began with a 25-year time horizon, but who is now approaching the time when the funds will be needed. In such a situation, the aggressive investor might become more cautious near the end of that time frame.
There is one fundamental “stumbling block” that all long-term investors, whether conservative or aggressive, must consider:
In an ideal world, an investment should be able to receive a return that outpaces the long-term effect of inflation. For example, if between now and your retirement, inflation averages 4% per year, and you keep money where it will earn 8% per year, the investment will have more purchasing power at your retirement than it did when it was first invested.
On the other hand, should the rate of inflation exceed the rate of return you earn on your investments, you will be losing purchasing power. Inflation has the potential to erode the wealth created by investment rates of return.
Consequently, while the terms conservative and aggressive may guide your overall investment strategy, there may be times when you might want to consider crossing the lines. The important point is to understand your investment objective, your basic level of risk tolerance, and your time horizon for each investment.
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