What type of investor are you?

March 28, 2022

Three questions can help you determine your investing style and set the foundation for how and why you invest.

 

Your investing style will generally be determined by your age, goals, and risk tolerance. Understanding your approach can help you feel more confident in your investment strategy. Knowing where you are as an investor can also help you adjust your strategy as you age and your financial goals change.

These three factors are the main guideposts for investment planning and can help outline your overall investment style.

 

1. Are you a risk tolerant or risk averse investor?


How comfortable you are with risk is a key differentiator.

Risk tolerant investors are more willing to invest in assets, such as stocks (aka equities) that have a chance of failure but also potential for a high return. Risk tolerant investors are also more comfortable with market changes and volatility.

On the other hand, risk averse investors prefer “safer” investments, such as bonds (though all investing carries risk). Read more about asset classes and their associated risk.

To determine your own risk tolerance, consider both the risk you’re willing to take and risk you’re able to take. Finding your personal distinction between these risk aspects could help you evaluate your investment choices.

  • More risk tolerant investors and/or those with a longer time to reach their goal will lean toward an aggressive asset allocation (made up primarily of stocks).
  • More risk averse investors and/or those with a shorter time to reach their goal will lean toward a conservative asset allocation (made up primarily of bonds).
  • If your risk tolerance and/or time to reach your goal is somewhere in the middle, you may want to consider a balanced asset allocation.
     

Compare how much money you can invest against your age and goals to help weigh how much risk is right for you. Are you missing out on investment opportunities because of risk aversion, even though you’re able to take the risk? Keep both aspects of risk in mind to help you evaluate your investments.

 

2. Are you an active or passive investor?


Not all investors want to spend time managing their own investments.

Active investors want to be involved in the research and analysis on what they’re investing in and the decisions that are made. These hands-on investors tend to have a higher risk tolerance and lean toward an aggressive asset allocation.

The passive investor prefers to set up investments and forget about them. Some investors may also take a hands-off approach by selecting passive investments, such as index funds, which are designed to track a benchmark (like a market index) and don’t require regular maintenance. This is known as passive investing.

Whether you’re an active or passive investor, it’s important to seek advice from a financial professional to help you find the right options as you work toward your goals.

 

3. Do you want to invest through a financial professional or a robo-advisor?


How 
you invest can also be determined by whether you prefer dealing with technology or people. If you prefer a human touch, regardless of whether you’re an active or passive investor, a financial professional can help you structure your investment portfolio.

If you’re an active investor and prefer technology, you can do it yourself through self-directed investing. This approach may be appropriate if you have some experience with investing or want to remove as many costs from your investing as possible.

For passive investors who prefer technology, there are automated investing tools available. Known generically as robo-advisors, the tool will ask you several questions about your goals and risk tolerance and then recommend a portfolio allocation that’s regularly monitored and balanced for you. Because automated options are often lower cost, they can be a good place to start if you’re just getting into investing or don’t have a lot to invest.

 

No matter your investing style, there are a few habits nearly all successful investors practice.

  • Set a goal. Understanding why you’re investing is crucial to guiding the appropriate investment strategies.
  • Discipline. Being disciplined about implementing your plan can help you avoid mistakes.
  • Patience. Avoid trading based on emotions or in reaction to market changes, either bad or good, and don’t try to time the market. Investing is about time in the market, not timing the market.
  • Diversification. A portfolio made up of a variety of stocks, bonds and other assets can lend some protection from market volatility.
  • Flexibility. Changes in life might mean you need to alter the course of your investment strategies, but always keep your goals in mind.

 

No matter what your investing style may be, you’ll want to manage portfolio risk. Here are 7 diversification strategies for your investment portfolio.

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