Your risk profile influences your asset allocation model, the type of financial instrument you’re likely to use, and the sector and share you’re likely to invest in. It also has an effect on your long-term expectations.
That’s why one of the most important things you can do is know what kind of an investor you are.
Here are four investor types you can use to determine your risk profile, according to Gareth Stokes’ Fear, Greed and the Stockmarket
Which of these four investment types –describes you?
No. 1: The timid investor
A timid investor is extremely risk averse. A typical timid investor keeps most of his funds in the bank – or even under his mattress!
If this describes you, you need to have to lift your game slightly, or inflation will ravage your investments. While you might be getting risk free returns, even the best fixed-deposit interest will lag other investment classes in terms of building and growing your wealth.
If you’re a timid investor chances are you’re not going to even consider investing in the stock market. You’re more likely to look for good saving accounts.
No. 2: The cautious investor
Also preferring to avoid risk, a cautious investor is still wary about investing directly in the stock market so unit trusts might appeal.
A cautious investor usually allows someone else to make his financial decisions after spending quite some time determining the best person for the job. If this describes you, you should be able to make inflation-beating returns.
While capital growth isn’t likely to be spectacular, at least time and inflation won’t be eating into your retirement fund.
No. 3: The shrewd investor
If you have even the slightest interest in investing, you’ll probably belong to this investment class already. A shrewd investor is quite comfortable entering the stock market and aims for reasonable returns from a range of carefully selected share investments.
Your portfolio will include cash, bonds and equities – with some unit trust and exchange traded fund exposure too. A shrewd investor accepts risk as an unavoidable side-effect of better investment return.
No. 4: The adventurous investor
If you decide to enter the world of more aggressively geared financial instruments, you fall squarely into this category. With a far greater tolerance for risk you constantly scan the market for opportunities to make short-term gains.
The adventurous investor concentrates on investment products with a higher risk reward relationship, such as trading options and single stock futures. Money management and disciplined attention to trading strategy is essential to avoid suffering big losses when trading these financial instruments.
By understanding what type of investor you are, you’ll be in a stronger position to set investment goals and plan for your retirement.