Know your tolerance for risk? Find out about investments strategies to match your profile.
Risk is the most important factor to consider when making financial decisions, according to affluent investors participating in Millionaire Corner surveys, but how does risk relate to individual investment strategies?
For most households, building wealth involves setting aside earnings and watching the earnings grow through a variety of investment strategies, such as stock mutual funds and Treasuries. The potential gains and losses of these investments relate to the risks they pose. (Find out some of the factors affecting an investor’s tolerance for risk.)
Risky investments offer the potential for the greatest return, yet they also have the potential for the greatest investment losses, according to the Financial Industry Regulatory Authority or FINRA. High risk investments tend to be the most volatile and lowest rated, and can also be illiquid. Examples of high risk investment strategies include derivatives, high-yield bonds and speculative stocks and stock funds. An aggressive investor is willing to place a significant portion of their assets at risk in order to achieve higher returns.
A moderate investor will place some of their assets at risk in the quest for yields, but also desires to protect a portion of his or her wealth. Moderate-risk investments include growth stocks, investment-grade corporate bonds and Real Estate Investment Trusts or REITs, according to FINRA. Moderate risk investments provide some growth and income, have the potential to outpace inflation and meet mid- and long-term investment goals, such as saving for retirement.
Conservative investors seek to preserve assets and avoid investment risk, though conservative investment strategies are vulnerable to inflation and interest rate risk, and investments charging penalties for early redemption are less liquid. Counting among conservative investment strategies are Treasury bills, bank certificates of deposits or CDs, money market funds, fixed annuities and savings accounts. Low-risk products can serve such investment strategies as maintaining a rainy day fund or holding assets for short periods of time.
Where do you fit in along this continuum? How much risk can you afford? (Millionaire Corner research shows that men are generally more comfortable with risky investment strategies.)