One of the secrets of picking investments wisely is knowing what your risk threshold and investment style is. Truth be told there are actually numerous unique investments an investor can choose, there exists only 3 investment models.
Very important: Each of these investment styles are associated directly to your own risk tolerance. The only three investment styles that exist are conservative, balanced, and aggressive.
A conservative investment style is defined as having a low tolerance for risk. Those with a high tolerance for risk will be deemed an aggressive investor. Along with your risk profile, your personal financial goals will help to dictate the style of investing you should use.
Let us presume you’re in your 20′s and early 30′s; you’ve got the time-frame before you to be able to handle much more risk and can afford to make use of an aggressive type of investing. On the other hand, if you’re saving your dollars to buy a home over the following year, you would definitely want to use a conservative style.
What defines a conservative investor is that they wish to be able to maintain their initial investment. For example, if you put $10,000 into high dividend stocks, that investor wants to get back a minimum of $10,000. This type of investor will usually pick fixed income investments like bonds or money market funds.
A balanced investor is willing to take on some risk and is open to adding in some common stocks to the bonds and/or money market funds. 50% of their investable investments will go into those less risky options, and the additional 50% into stocks and much more aggressive investments.
Exactly what describes an aggressive investor is they are prepared to accept a lot more risk. They want to see higher returns, but at the potential for losing more cash. With the more risk you adopt, you need the upside to be much higher. Aggressive investors usually put most if not all their money into stocks.
As you can tell, your investment choices rely on your financial goals and risk tolerance. Additional risk equals greater reward, although with the possibility of losing more of your hard earned money. Be cautious and choose prudently.
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