What is Your Investment Risk Tolerance?
Investment Risk Tolerance
As an investor,
many of your decisions will be made based upon your investment
risk tolerance. Some people are bearish, believing that the
market will decline, while others are bullish, expecting that
the market will rise in value. Also, investors can be
classified into risk tolerance categories based upon their
willingness to accept investment risk for any given level of
portfolio return. There are four primary classifications of
investors based upon risk tolerance, including Aggressive,
Moderately Aggressive, Moderate and Conservative. Do you know
which type of investor you are?
Aggressive
Investors
Aggressive
investors are most often focused on investment growth through
the use of equity investments. Their investment time frames are
generally 7-10 years at a minimum, and they are willing to
accept portfolio risk in any given year in exchange for an
increased expected portfolio return over the long term. The
investment return that they expect to earn is on average higher
than the market returns annually as a whole. For example, the
market typically earns on average 10% per year in returns,
while an aggressive investor is seeking returns often above 12%
per year on average.
Moderately
Aggressive
Moderately
Aggressive investors are also seeking capital growth through
the use of equity investments, however, their risk tolerance is
lower than that of an aggressive investor and they typically
are seeking market average returns, not above market average
returns. While the overall investment objectives are often
similar to aggressive investors, their general portfolio mix
contains more moderate investments and is often more
diversified across asset classes to provide more portfolio
stability. The recommended investment time frame is between 6
and 10 years.
Moderately
Conservative
Moderately
Conservative investors will often have a portfolio that is more
blended, seeking a balance between investment growth and
capital preservation. A moderately conservative investor is
much less willing to accept portfolio value variations on a
year to year basis and is often seeking an investment income
stream from their portfolio. To balance out the risk in the
equity side of the portfolio, a moderately conservative
portfolio will often contain bonds, real estate and other fixed
income investments. The average rate of return that a
moderately conservative investor targets is between 6-8%, and
the average investment time frame is generally between 3-6
years.
Conservative
A conservative
investor is seeking capital preservation and is often seeking
current income from their portfolio's assets. The time frame
for a conservative investor is generally under 3 years in
length, causing the portfolio to often contain a higher ratio
of cash assets and bond assets so that it can remain liquid as
well as so that it can provide an income stream. While there
can be some equity component to a conservative portfolio, the
more common asset classes will be real estate, individual bonds
or bond funds, cash and possibly fixed annuities.
An investor's risk
tolerance will change as their investment time frames change
and as their investment objectives change. Risk tolerance is
designed to serve as a guide for portfolio investment
selections and should be considered prior to the selection of a
given investment. You can determine what your personal risk
tolerance is by evaluating your personal goals as well as by
completing a risk tolerance quiz.
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