Friday, June 17, 2011

What is Your Risk Profile?

By Jonathan Poole
It’s a fact of nature that human beings are absolutely in love with the thrill of taking risks. Of course, that’s not say that all risks are equal for every person, because they absolutely are not. In fact, some people find a certain types of risk perfectly acceptable while they arbitrarily have zero tolerance for other risks that fall under a different category. For example, someone may enjoy taking physical risks while shying away from emotional risks.

When it comes to online stock trading and investing, oftentimes a financial advisor will ask you a series of questions to determine what kind of investment opportunities to present to you. This assessment helps determine what is commonly referred to as a risk profile, and what it boils down to is how comfortable you are with losing money. While companies use different names and categories to determine your risk profile, here is a quick breakdown of five main risk profiles.

Aggressive investors want to make more money, and they want to do it in style. They tend to take extravagant risks. This kind of investor is usually young and trend toward overconfidence. Aggressive investors don’t mind losing money because there’s more where that came from or they already have substantial funds in reserve. They tend to invest in more volatile small-cap companies and some mid-caps because of the potentially higher payout if things go exceptionally well. On the other hand, they also stand to lose quite a bit if their investments go poorly.

Moderately Aggressive
Moderately aggressive risk-takers are long-term investors who can patiently wait for their stocks to increase in value. Although this kind of investor tends to be down more than average when the market is down, moderately aggressive investors also tend to be up quite a bit when the market swings back up.

Like almost everything else in life, the majority of investors tend to fall in this category, right in the middle. These investors lose less when the market goes down and are slightly above average when the market goes up. They tend to have a balanced portfolio and are usually investing for retirement.

Moderately Conservative
Moderately conservative investors are generally a little older, and are already retired or preparing for impending retirement. They might also have experienced large losses in the past. They want to take more risks than conservative investors do, but they also want to protect themselves from losses during downside fluctuations in the market.

Unlike aggressive investors looking to make a quick buck, most conservative investors only want to hang on to what they have. Many conservative investors can no longer work and are unwilling to risk losing any of the income they have left. Most of the time, investors who cannot tolerate any risk whatsoever are better off leaving their money in a bank account.
Of course, there are groups within groups as far as risk profiles go, and this is just an overall look at some of the main categories. You may find that one of these risk profiles describes you perfectly, or you might feel like a hodgepodge risk-taker. Whatever category or categories you feel best describe your investment strategy, using a risk profile is a quick, easy way to try out a stock trading pattern and see if it works for you.

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