Because investing is not a sure thing in most cases, it is much like a game of odds — you really won’t know the outcome until the game has been played and a winner has been declared.
Anytime you play any sort of game, you have to have a strategy.
Investing isn’t any different — you require an investment strategy.
Knowing what your risk tolerance and investment style are will help you choose investments more wisely.
While there are many different types of investments that one can make, there are really only 3 basic fundamental investment styles — and those 3 styles are linked to your risk tolerance.
An investment style is basically a set of rules for investing your cash with specific assets that will help you meet your financial goals in a particular amount of time.
Each asset class contains individual investment holdings that you must select from.
A clothing store sells clothes — but those clothes consist of shirts, pants, dresses, skirts, undergarments, etc.
The stock exchange is a type of investment “store,” it contains assorted classes of equities, all representing different companies that you are able to invest in.
If you haven’t done your research, it may quickly become very overwhelming — simply due to the fact that there are so many companies and funds to choose from.
This is where your strategy (your combined risk tolerance and investment style) comes into play.
If you’re new to investing, work closely with a financial planner or do extensive research before making any investment decisions.
These will help you develop an investment strategy that will not only follow the limits of your risk tolerance and your chosen investment style but will help you achieve your financial goals.
Never invest cash without having a goal and a strategy for reaching that goal!
This is essential.
Nobody hands their cash over to anyone without knowing what that money is being used for or when they’ll get it back!
If you don’t have a goal, a plan, or a strategy, that’s essentially what you’re doing!
Always start with a goal and a strategy for reaching that goal!
The 3 investment styles are conservative, moderate, and aggressive…
Naturally, if you find that you don’t have a strong stomach for risk, your investment style will most likely be conservative or moderate at best.
If you have a high tolerance for risk, you’ll most likely be a moderate or aggressive investor.
At the same time, your financial goals will likewise have an impact on what style of investing you utilize.
If you’re saving for retirement in your early twenties, you should utilize a conservative or moderate trend of investing — but if you’re attempting to get together the funds to buy a home in the next year or two, you’d have to utilize an aggressive trend.
There’s pretty much no way around it.
Conservative investors wish to maintain their initial investment and not lose any portfolio value what so ever.
Put differently, if they invest $5000 they wish to be sure that they’ll keep their initial $5000 value with some return.
Having their portfolio dip to $2500 and then shoot up to $8000, would give them major anxiety.
This type of investor commonly invests in common stocks and bonds. Reliable but won’t give you unbelievable returns.
An interest earning savings account is also really common for conservative investors.
Steady as she goes.
A moderate investor commonly invests much like a conservative investor but will utilize a portion of their investment funds for higher risk investments.
A lot of moderate investors will invest 60–70% of their investment funds in safe or conservative investments, and then invest the remainder in riskier investments.
This way the bulk of your money is safe while the money you are willing to risk can potentially double.
Of course, if you are utilizing this method you will have to deal with some anxiety and monitor your holdings closely.
Even though 30–40% isn’t all of your money, is still a very significant portion that you wouldn’t want to lose.
An aggressive investor is willing to take the big risks that other investors wouldn’t dare take.
They invest higher sums of money in riskier ventures with the hopes of achieving larger returns — either overtime or in a short amount of time.
Aggressive investors often have all or most of their investment funds tied up in speculative investments.
Tech stocks, startups, and crypto are where the bulk of their money sits.
They at once have the greatest PROFIT potential and the greatest LOSS potential.
To use this style you must have a strong conviction in what you are doing and even then, you could still lose everything.
Most successful investors will discourage other investors (especially newbies) away from this style of investing.
The first rule of investing is “don’t lose money,” and with this method, you’re losing and gaining multiple times a day.
Again, determining what style of investing you’ll utilize will be determined by your financial goals and your risk tolerance.
No matter what type of investing you do, however, you should cautiously research that investment.
Never invest without having all of the facts! Otherwise, you’re just gambling.