Have you ever consulted with a financial advisor or taken a quiz about investing, and as a result someone called you “aggressive”? It’s a term that gets used pretty frequently in my industry, but I think it is often misunderstood. A lot of people get uncomfortable with the idea that they might be an aggressive investor, but “aggressive” is not the same thing as “speculative”.
The Conservative-Aggressive Spectrum
We have a saying around the office that “risk” and “return” are related, so in order to explain what being an aggressive investor truly means, I want to define what I call the conservative-aggressive spectrum. Your expectation to grow your money, relative to your appetite for seeing the account balance fluctuate, dictates where you fall on this spectrum. Conservative investors typically want very little downside potential and are comfortable getting a smaller return for that peace of mind. Aggressive investors understand and are comfortable with the risk involved with investing but expect to be rewarded for taking that risk with better returns over a period of time. More conservative investors tend to favor investments like CDs, bonds, etc. while more aggressive investors favor things like stocks. However, just because you are comfortable with risk doesn’t necessarily mean you should be taking it on.
Avoiding Unnecessary Risk
If you are an investor that leans towards the aggressive side of the scale, you want to avoid taking on unnecessary risk, and there is a way to do that. This is a word I’m sure you’ve heard before: diversification. You can reduce the amount of risk you are taking in your stock portfolio the same way you protect your eggs — by putting them in different baskets! A speculative approach typically focuses on finding that needle in the haystack, which inherently exposes you to unnecessary risk. If your portfolio is concentrated, you may own only one stock or a small handful of stocks. In this case, you are exposed not only to the financial stability of the company, but leadership changes, acquisitions, or regulatory changes. If you happened to make the wrong stock pick, you’re in big trouble. Conversely, if you are diversified you may own, for example, one thousand stocks. Then if one, two, or even 100 of those companies do poorly, you still have the other 900 keeping you afloat.
What does it mean to be an Aggressive Investor?
Just because you have a high tolerance for market risk DOES NOT mean that you should be taking unnecessary or speculative risks with your money. Whether you are conservative, aggressive, or somewhere in between, those terms are used to identify roughly how much of your portfolio should be in stocks and how much should be in bonds. However, in any case, the investments in your portfolio should be diversified and chosen with lots of thought and purpose.
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Written by Justin Meyer