Managing our own portfolio can be overwhelming, to say the least. And when we do that, we have to consider our risk tolerance, which is an incredibly important part of portfolio management.
Depending on your age, income, holdings, and goals, you will belong to a certain spectrum of investors according to risk tolerance. And you can manage your portfolio based on your spectrum.
Very Aggressive Investor
If you’re a very aggressive investor, you will want all of your investments to be in stocks and equities and none in bonds.
There are investors who argue that having at least a small portion in bonds is necessary, but for the aggressive investor the account needs the most boost it can get while he or she is young.
Putting 100% of your portfolio into stocks and equities means you are taking on a lot of risks. To manage that risk, many investors will bet on mutual funds, which are spread out through hundreds of stocks.
Just like the very aggressive investor, the aggressive investor will want a huge chunk of his portfolio dedicated to equities.
On the other hand, the account will also bet on blue-chip, or large-cap, stocks, which are companies with big reputations and with minimal risks to fail. They also bet on some bonds.
The combination of blue chips and bonds won’t go up as much as an all-equities portfolio, but it won’t also plunge as badly.
The largest caveat here is just like the one for the very aggressive investor. You want to spread the risk around with mutual funds so that there’s a lower chance that you’ll lose everything in one market downturn.
The aggressive investor will usually have a portfolio that’s made up of 70% to 90% equities, and the rest allocated to other securities.
Investors who have already gone some years in their career but are still many years away from retirement will probably be balanced investor.
These investors aren’t taking any substantial risks anymore. They now prefer steady growth. The biggest risk is that a huge market downturn can break your investments and throw off your entire retirement plan.
To fight this risk, it’s wise to move into more equities and possibly look at some alternative investments.
Investors who already have a firm retirement date will most likely be conservative investors. They don’t want to risk losing large portions of their account, though they still need some amount of risks to fight the speed of inflation.
The allocation will likely be between 20% to 40% equities, which will be almost all blue chips, preferably those that pay dividends, to put a cap on volatility.
The risk will not about losing money, but rather the risk of not growing fast enough.
Very Conservative Investor
Now, if you’re a very conservative investor, your retirement date is probably just a couple or more years in the future. Your goal will no longer be to grow your money, but to preserve it.
So, you take very little risk. Your primary objective is to keep up with inflation. Your account should be 20% equities, while your income should be invested in cash equivalents.