Knowing your Risk Tolerance or Risk Profile is important for smart investors. Below you’ll learn what it signifies AND why you need to know it.
Which Model Portfolio is Right For You?
If you work with an advisor they often use a few model portfolios which they’ll adapt for the unique needs of each client. Your risk profile indicates which of these model portfolios might become a good basis for your own, custom portfolio.
TYPES OF INVESTORS
Investors are usually categorized as “conservative”, “moderate” or “aggressive”, with in-between categories of “moderately aggressive” and “moderately conservative” which are based on your questionnaire responses.
The Conservative Investor
If you absolutely do not want to risk losing money, or if your first priority is consistent income to live on, you are a conservative investor. If these are your concerns and you are retired or about to retire, you should probably avoid high-risk investments.
If you retire with an aggressive portfolio and your investments tank, it could take (many) years to rebuild your savings, years you might not have.
The Moderately Conservative Investor
However, many pre-retirees and new retirees are moderately conservative: they are cautious with money in their lives and don’t want to take on a risky portfolio, but they still have a need to accumulate assets because they have either started saving for the future too late or lost assets as a result of market downturns or poor or unfortunate financial decisions.
The Aggressive Investor &
Moderately Aggressive Investor
Aggressive and moderately aggressive investors commonly want to match or beat the markets. Or, they are looking to save for retirement at a highly accelerated rate.
Some are “market junkies” who watch Wall Street on a daily basis. Most of them are expecting to build substantial wealth someday.
They tend to be young investors or in the middle stage of life. Most of have NOT been hit hard financially as a result of investing, and many of them have substantial income or savings.
The moderately aggressive investor is willing to wait a bit longer to reach his or her goals, while the aggressive investor tends to be in a hurry by comparison.
The Moderate Investor
Typically, the moderate investor starts investing roughly about the time of major life events – that first stable job with a corresponding 401(k), a marriage, the start of a family.
Often, the moderate investor is a younger investor saving or investing for long-term goals (usually their child’s college education and retirement). These midlife investors frequently have a “balanced” portfolio, with a mix of conservative and riskier investments across varied investment classes. These investors are willing to accept some losses and risks and are pragmatic and usually educated about the realities of investing and their investment options. Some moderate investors are retired or nearly retired, having either retained their investment stance out of necessity (they need to continue accumulating assets in retirement) or out of preference (they do not want to “miss out” when the bulls run on Wall Street).
These midlife investors frequently have a “balanced” portfolio, with a mix of conservative and riskier investments across varied investment classes. They are willing to accept some losses and risks and are understand the realities of investing and their investment options.
Some moderate investors are retired or nearly retired, having either kept their investment stance out of necessity (they need to continue accumulating assets in retirement) or out of preference (they do not want to “miss out” when the bulls run on Wall Street).
What’s your risk number?
Now that you know all this it’s time to figure out your risk tolerance. You can use our free tool to learn what your risk number is. It’s great information to help you build the best portfolio for your goals.
This material was prepared, in part, by MarketingPro, Inc.