Deciding What Kind of Investor You Are - dummies

By David Stevenson

Part of Managing Your Investment Portfolio For Dummies Cheat Sheet (UK Edition)

Investors come in many forms. In very general terms, there are the low-risk, very cautious investors and then there are the higher risk and more adventurous investors. See which category you fall into as an investor and what your drives and expectations are when it comes to your investment portfolio.

Here are some strategies that characterise the average lower-risk investor:

  • Absolute returns: Even low-risk investors like to think that they can make a positive return, which explains why so many are attracted to the idea of absolute returns; that is, making money in all markets, whether those markets are rising or falling in value.

  • Bonds: Bonds are likely to be a favourite in terms of asset classes, simply because they tend to be less volatile and produce income. Crucially, the promise to repay that’s implicit within a bond structure (at redemption) is likely to be very attractive.

  • Capital preservation: Lower-risk investors hate losing accumulated capital, and so tend to want to preserve their capital no matter what. Alternative assets, such as gold, that speak to capital preservation may make a fleeting appearance in the cautious investor’s portfolio.

  • Currency exposure: Currency exposure probably becomes less of an issue for cautious investors. They usually want to limit their portfolio of investments to those denominated in the currency of their home base.

  • Equities: Shares are likely to be much less attractive because they’re regarded, rightly, as fairly risky. If an exposure to shares does exist within the portfolio they’re likely to be blue chip stocks with strong balance sheets and sensible valuations.

    No intrinsic reason exists as to why cautious investors shouldn’t be interested in more sophisticated styles of investing that look to limit downside risk by hedging.

  • Income: This is critically important to many cautious investors largely because as they approach retirement they tend to turn their attention to eking out a monthly income from their accumulated savings.

And here are some strategies the average adventurous investor is likely to follow:

  • A focus on capital growth.

  • A willingness to make losses in the short term.

  • Less concern about income.

  • An interest in complex strategies that involve options, hedging and derivatives.

  • A global focus, including in their currency exposure.

  • A concentration on shares as their portfolio’s core component.

  • An emphasis within the share component of the portfolio on growth opportunities.

  • A great interest in alternative assets.