It’s very important to determine your investor profile before you start investing.
By doing so, you will know what types of products to buy and how long to hold them for.
In this article, I will present the three most common profiles.
How to Determine Your Profile
If you go see a financial advisor, they will ask you a series of questions to understand your personal situation and your financial objectives. They will then recommend you adopt a given strategy based on your answers.
Here are some of the questions they will ask you.
- Your age
Generally speaking, younger people can take more risk than older people. Indeed, young people have few family obligations and the enviable advantage of time. Fewer obligations means they have more disposable income available to invest and the advantage of time means they can a) wait for long term strategies to start paying off and b) earn back lost money if their strategy goes sour.
Older people nearing retirement age need to be more cautious because they don’t have the time to make up for losses if things go badly. Thus, they need to focus on preserving capital, hedging against inflation and generating income.
- Your personal situation
Are you single or married? Do you have children? Do you have a stable job and a reliable income stream? Do you foresee any major lifestyle changes in the coming months/years?
You must do a comprehensive audit of your personal situation and your financial capabilities. Are you able to invest regularly or periodically? Are you able to save on the side in addition to investing? Will you need to reevaluate your investment strategy down the road?
You must anticipate future life changing events (marriage, birth of a child, change of profession, moving cities/countries, etc) and be prepared to adapt your strategy to your changing situation down the road.
- Your objectives
Why are you investing? What are your financial goals? Take the time to really think about these questions because they are the reason why you are injecting your hard earned capital into the markets.
People invest for many different reasons: to grow their savings, to finance a personal project, to start a college fund for their child, to retire early or reach financial independence. Each of these objectives requires a specific strategy and the purchase of different financial products.
- Your investment horizon
How long are you willing to invest for? Whether you plan on investing for 1 year of 50 years, you need a plan. Generally speaking, short term strategies require safe strategies whereas long term strategies can balance risk given that time is on your side. Whatever your investment horizon, you must pay special attention to your tolerance for risk.
- Your tolerance for risk
This is perhaps the most important of all factors to consider. Indeed, investing is a constant struggle between the temptation to obtain high returns, which comes with high risk, and the desire for safety, which comes with lower returns. Always remember that high rewards come with high risks. Also remember that seeing your portfolio fluctuate in value is a rollercoaster of emotions.
How will you react if your investment goes down 50% and stays deep in the negative for several months? Will you have the patience to wait for your strategy to work or will you lose sleep and go crazy? Keep in mind that money is the main reason why people separate and divorce so also make sure that you and your spouse are on the same page when it comes to investing.
Everyone has different risk tolerance, and knowing yours is of the utmost importance.
1 – The Conservative Investor
The Conservative Investor has zero tolerance for risk.
He is concerned with preserving his capital, hedging against inflation and generating income from his investments. He strongly dislikes volatility and favors liquidity, which is the ability to withdraw portions of his investments whenever he needs it. As a result, he invests the majority of his money in fixed income products and low risk assets.
Here’s what a conservative portfolio can look like:
- 50%: S&P 500 Index Fund : Mutual Fund
- 30%: Savings / Certificate of Deposit / Bonds
- 20%: Dividend Stocks
Who should favor a conservative approach?
Beginners and people nearing retirement age.
Beginners should favor a conservative approach until they understand how the markets and all the different financial products work. People nearing retirement age should also adopt a conservative approach to preserve their capital and generate income via dividend stocks and bonds. They should not pursue aggressive strategies because they don’t have time to make up for their losses if things go sour.
2 – The Balanced Investor
The Balanced Investor strikes balance between safe and risky.
He knows that it’s difficult to beat the market over the very long term so he invests the majority of his money in passive investments such as index funds and mutual funds. However, he also likes to do some active investing so he allocates 10% of his portfolio towards stocks and cryptocurrencies.
Here’s what his portfolio could look like:
- 50%: S&P 500 and/or Nasdaq Index Fund
- 30%: Dividend Stocks
- 10%: Stocks / Crypto
- 10%: Savings
Who should favor this investment approach?
The vast majority of investors should adopt this approach, simply because it’s the most balanced and provides the best risk-reward scenario. The share allocated to stocks and crypto can be bumped up to 20-30% depending on your risk tolerance, your knowledge of fundamental analysis and your investment horizon. As always, it’s best to take it slow and get comfortable with the markets before committing too much capital to riskier assets.
3 – The Aggressive Investor
The Aggressive Investor is a risk taker who has no fear committing the vast majority of his capital towards active management of his portfolio. He sacrifices liquidity in order to achieve high growth of his investment. Thus, he allocates a very small part of his portfolio in savings, index funds and dividend stocks and places most of his money in high-risk assets such as stocks, crypto, options, warrants and short-selling.
Don’t get it twisted: the aggressive investor is not a gambler.
He is a sophisticated investor who takes calculated risks. He has extensive experience navigating the markets, very strict risk management and solid technical and fundamental analysis capabilities. He does some day trading (buying and selling stocks on the same day), swing trading (buying a stock and selling it days/weeks later), options and futures trading and sometimes forex trading. He knows how to sell covered calls/puts and how to trade on margin.
In sum, the aggressive investor is very savvy and has a go big or go home mentality.
Here’s what his portfolio could look like:
- 75%: Stocks / Options / Crypto
- 10%: Nasdaq Index Fund or similar
- 10%: Dividend Stocks
- 5%: Savings
Who should adopt this approach?
Very experienced investors with a high risk tolerance. DO NOT pursue this approach if you are new to investing. Start safe and progressively work your way towards purchasing riskier assets once you get comfortable. Don’t bet your capital on risky stocks because some anonymous person on internet an forum says this thing will moon. It will end badly 99% of the time.
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DISCLAIMER: This article is the fruit of my personal research and should not be viewed as financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.