What Is Your Investing Style?
Knowing your investing style when it comes to getting starting with investing can save you a lot of headaches later. Investing style has a lot to do with knowing how much risk you are willing to take in exchange for the returns you seek.
Determine Your Investing Style
Knowing your style will make you a better investor.
Understanding what kind of investor you are (or perhaps want to be) can be very important to your success when you start down the path of investing in financial products like stocks, bonds, mutual or exchange traded funds.
Generally, investors can be identified in two or three ways. One way to identify your investing style
is to determine your tolerance for taking risks. Often times a new investor wants both the best returns in terms of growth while making sure they are not taking risks. But these two objectives are not mutual. Buying government bonds is a safe way to generate a bit of income, but very little growth. Government bonds are often considered risk free, because everyone knows the government will
always pay the interest due and you will be able to redeem the bond at face value when the bond matures.
Stocks on the other hand come with some risk. Namely the value of a stock could drop to zero or at least fall below your purchase price. However, if you buy a quality dividend paying stocks with a long history of paying out increasing dividends and they are a leader in their market, with good management, you are reducing your risks.
Risk tolerance is the amount of loss an investor is prepared to accept when making an investment decision. Several factors determine the level of risk an investor can afford to take.
Knowing the risk tolerance level helps investors plan their entire portfolio and will drive how they invest. For example, if an individual’s risk tolerance is low, investments will be made conservatively
and will include more low-risk investments and less high-risk investments.
Investors are usually classified into three main categories based on how much risk they
can tolerate. They include aggressive, moderate, and conservative.
Investors are usually classified into three main categories based on how much risk they can tolerate.
The categories are based on many factors, the three categories are:
Aggressive risk investors are often well versed with the market and able to take bigger risks. Such
types of investors are used to seeing large upward and downward movements in their portfolio.
Aggressive investors often prefer asset classes with a dynamic price movement, such as stocks and realize they are taking measured risks for greater returns, Due to the risk they take, they see higher returns when the market is doing well and larger losses when the market performs poorly. However, they do not panic and sell at times of crisis in the market as they are used to fluctuations on a daily
basis and periodic market corrections.
Moderate risk investors take on some risk and usually set a percentage of losses they can handle.
They balance their investments between risky and safer assets like bonds. They are more likely to
earn less than aggressive investors when the market does well but does not see huge losses when
the market falls.
Conservative investors take the least risk in the market. They do not indulge in risky investments at
all and go for quality dividend paying stocks and bonds with secure interest rates they feel are safest.
A conservative investor is more likely to hold more money in cash waiting for good investment opportunities. They prioritize avoiding loss of capital over short-term gains.
Factors that Influence Your Risk Tolerance
Investor adopt different time horizons based on their investment plans. When you have more time,
you can take a bit more risk.
Financial goals differ from individual to individual. The amount of money required to achieve certain goals is calculated, and an investment strategy to deliver those returns is followed.
Younger individuals should be able to take more risks than older individuals. Young individuals have
the capability to make more money working and have more time on their hands to handle market fluctuations.
4. Portfolio size
When you have a larger portfolio, you are more likely to be willing to take more risks. Once you have
a core portfolio of stocks and bonds you plan to hold for longer periods you can take on some more speculative investing.
5. Investor comfort level
Each investor handles risk differently. Some investors are naturally more comfortable with taking
risks than others.
Ignoring Your Investing Style
Investing without considering your investing style can prove to be fatal. An investor must know how
to react when the value of investments falls. You don’t want to be an investor who flees the market taking losses because they panic in a market correction. Market corrections are often excellent times
to buy stocks at a discount.. Understanding and following your investment style when it comes to risks helps in making informed decisions and not hasty decisions.
Knowing the risk tolerance level helps investors plan their entire portfolio and will drive how they invest.