Australians, on a per capita basis, are the biggest investors in the world. No matter what kind of investing you do - bonds, share options, managed funds, gold, commodities, real estate - in order to be successful you need to have a thorough understanding of your personal investment style.
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Understanding your investment style ... continued from above
By D. Silva
Some investors are risk takers, some investors are
conservative, some investors are a combination of the two, depending on their
cash position and the form of the investment.
Understanding your personal risk tolerance and
investment style will aid you in making smart investment choices.
While there are many different types of investments, there are only three
specific investment styles – and those three styles directly relate to your risk
tolerance.
The three investment styles are:
-
conservative,
-
moderate, and
-
aggressive.
These styles are dependent upon your tolerance of
risk and how much time you're willing to invest in ... your investing.
For example, some investment strategies may have you watching prices go up and
down continually throughout the day.
Are you equipped to handle these changes,
especially if they don't go your way?
Other ventures may place your entire investment at
risk.
You could lose all your money.
Is that something that would weigh heavily on your
mind, possibly affecting the way you handle the investment?
Do you panic easily?
Are you able to stick to the numbers and the plan
they represent, with clear cut entry and exit points?
Or are you the type to watch an investment dive
and toss out the original plan in the hope that the investment will eventually
come back?
Also important to consider: how involved do you want to be in your investments?
-
Do you want to trade daily and make a career out
of it?
-
Do you want to overlook and control every aspect
of your investments?
-
Or would you prefer a more passive role, spending
only an hour a week or a month in making sure everything appears on track?
-
Do you prefer to do your own research or rely on
the research of others?
The next consideration is your life situation.
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For instance, if you're investing for your
retirement and you're in your early twenties, a conservative or moderate
approach to your investments is often the best road to take.
However, if you're investing for your retirement
and you're in your mid-fifties, you may have to be more aggressive, and
therefore a little riskier in your investments.
In the same vein, if you're trying fund your first
house, your approach will generally be more aggressive because your time-line
for generating profits will be dramatically shorter than if you were simply
working toward a goal such as retirement.
Conservative investors want to preserve their initial investment.
If they invest $5000, they want to be sure that
they'll get their initial $5000 back.
Common shares and bonds, short term money market
accounts, Treasury notes, high-rated municipal bonds, CDs, even interest earning
savings accounts are generally preferred investments for this type of investor.
They tend to steer clear of shares, since shares
can loose their value.
A moderate investor invests similarly to a conservative investor, with the goal
of increasing the value of their investments without risking any major losses.
They'll generally use a portion of their
investment funds for higher risk investments.
Many moderate investors invest 50% of their funds
in safe or conservative investments, with the remainder in something slightly
riskier (blue chip shares, for example).
An aggressive investor is looking for significant gains, and he's willing to go
out on a limb with his initial investment to achieve these gains.
Individual shares, managed funds, share options,
and some of the speculative markets are all potential investments for the
aggressive investor.
Larger returns, generally in the short run, are
the goal here.
Determining the style of investing that best fits your personality, life
situation, and financial goals is the most important step toward making
successful investments.
However, no matter which approach to investing you
take, always do your due diligence. Never invest without having all of the
facts.
D. Silva is the webmaster for Mastering ForEx
Trading, a website dedicated to foreign exchange trading, how to get started,
and how to succeed.
Disclaimer:
The information contained above has been provided as a general
service. Any references to specific financial, legal, accounting, or
taxation issues are done so in the context of general information
and should not be relied upon as fact or construed as advice by the
us in any of these areas. You should consult a relevant financial,
legal, tax or accounting professional to assist in your particular
circumstance. |