Have you ever spoken to a financial advisor, or taken a quiz relative to 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 at 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 desire for return, relative to your appetite for downside risk, 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, there is a way to participate in the stock market without taking on unnecessary risk. 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 leads to trying to time markets or being too concentrated in your investments (as opposed to being diversified). If your portfolio is concentrated, you may own only one stock or a small handful of stocks. If those few companies go under, you’re in big trouble. If you’re diversified, you may own, for example, 1,000 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 how much of your portfolio should be in stocks and how much should be in bonds. However, in any case, the types of stocks and bonds you are investing in should be diversified and done with lots of thought and purpose.
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Written by Justin Meyer