What Is Your Risk Tolerance As an Investor: Low, Moderate, or Aggressive?

Have you ever thought about the financial risk you’re comfortable with? Well, it’s a big deal if you’re exploring investment options. If you’re aiming for major financial goals like retirement or college funds for your kids, getting your risk just right matters a ton.

Sadly, here’s the truth: a significant portion of the Filipino population does not have investments—75% (around 54 million) of Filipinos, do not have investments, indicating a low level of participation in the investment market.

This suggests that there is a big room for growth in the investment sector, and efforts are being made to improve financial inclusion and encourage investment among Filipinos.

Knowing your risk appetite or risk tolerance in investments gives you a better understanding of where to put your eggs — in different baskets. So, let me walk you through the risk tolerance: low, moderate, and aggressive.

What’s risk tolerance?

Risk tolerance is an individual’s capacity and willingness to endure the potential loss in their investment portfolio. Several factors like financial goals, time horizon, investment goals—short and long term—and attitude influence the tolerance towards risk. The comfort level of an individual helps shape the investment mix.

To simplify this: the more comfortable you are with risk, the bolder you might be in pursuing investment options that could see larger swings in value but potentially bring greater returns over the long haul.

On the flip side, if the thought of even small dips in your portfolio keeps you up at night, you might lean towards safer, more stable investments.

Knowing your risk tolerance is key to deciding where to put your money.

What’s your investment style: low, moderate, or aggressive?

Regarding investment style, you’re either an adventurous one or a safe player. Or you can be both. Let’s look at the three types.

1. Low-risk investor or safe player

This type of investor is cautious and wise when it comes to investment strategy, valuing safety and predictability.

The defining traits are the following:

• Hesitant to take risks: They generally shy away from uncertain investments, seeking more secure and consistent returns instead—albeit at typically lower rates.
• Fearful of losing money: The financial choices are heavily swayed by the fear of losing money. Due to worries or nervousness, market slumps may drive them to liquidate holdings quickly.
• Limited investment duration: These investors are likely eyeing a nearer use for their funds, possibly because retirement is too soon or they’re gearing up for a big expense.

Which investments are ideal for low-risk investors?

For investors who avoid risk and prefer constancy and safety of capital, the following choices are apt:

• Bonds and bond funds: These type of investments reduce risk and yield a steady income through interest.
• High-interest savings accounts: Such accounts give a secure and small-scale return, about 2.5% to 5%.
• Money market funds: Investing in safe, short-term instruments, these funds are categorized as having low risk.
• Certificates of Deposit (CDs): Offering a guaranteed interest rate over a particular term, CDs guarantee certain earnings.
• Government securities: Treasury derivatives such as bills, notes, and bonds promise safety, backed by the solidity of the Philippine government.
• Dividend stocks: Shares in established, large corporations that regularly pay dividends can generate regular income and moderate safety. MP2 Savings is a good example, with a track record of earning roughly 6% to 7% annually.

What are the cons of low-risk investments?

Though prioritizing security minimizes serious losses, being too conservative in investing comes with its disadvantages:

• Less earning potential: Conservative assets typically yield lesser returns than high-risk ones like equities, potentially hampering portfolio growth as time passes.
• Lost chances for gains: Those who steer clear of high-risk investments might miss considerable capital growth in bullish markets.
• Less chances of fighting inflation: The earnings from safe investments may lag behind inflation rates. For example, if earnings are only about 2% to 3% and inflation keeps budging to about 5% to 7%, this can weaken the invested capital’s purchasing power in the long run.

In a nutshell, low-risk investors or safe players prefer peace of mind and safety over their investments.

2. Moderate risk taker or tolerant investor

Moderately tolerant individuals strike the balance between risk and reward. They want to get the best of both worlds but are still cautious. I am this type of investor.

I don’t mind a dash of excitement to increase the gains in a bullish market, so I sometimes dip my toes into high-risk strategies. However, I generally opt for a steady journey with compounding gains for the long term.

Below are some of the key traits of a moderate investor like me:

• Balanced risk perspective: They understand that some risks come with the promise of better gains, but they are also so steady that they know when to enter if there’s movement in markets.
• Prefer long-term goals: With sights set on long-term goals, these investors are satisfied with the market’s ups and downs. But they’re not easily discouraged by these fluctuations.
• Diversification—their golden rule: It’s all about a variety for these investors—stock here, real estate there, and a Bitcoin over there. This well-rounded investment platter is crafted to absorb shocks and delights with rewards over time.

Which investment types are suitable for moderate risk-averse investors?

Here’s how moderate risk-takers build their investment forts:

• Stocks and equity funds: They invest in the stock market and equity funds, hoping to reap the benefits of growth.
• Bonds and dividend stocks: They also understand the gains and losses from bonds and dividend stocks.
• Other alternatives: For potential profit, they might dip their toes into the pools of real estate, cryptocurrencies, and commodities like gold.

Why do moderate investors like diversification?

For moderate investors, they like putting their eggs in different baskets.

Here’s why they bank on diversification:

• Reduce risking the portfolio: They hold different investments so that they can offset the losses over better-performing companies in the market. Think of it as having a safety net.
• Hedge to market volatility: By spreading investments across different types of assets, investors can lessen the effects of market fluctuations. For example, stocks and bonds often move in opposite directions; holding both can help stabilize the portfolio’s performance over time.
• Make investing more enjoyable: For some investors, diversification can make the investment process more engaging and enjoyable. It encourages researching new industries, comparing companies, and emotionally investing in different sectors. This aspect of diversification can add a layer of personal satisfaction to the investment process. It’s not just a financial strategy but also an intellectually stimulating activity.

Those with moderate risk tolerance are relatively shrew. They craft a varied investment portfolio designed to grow steadily over time while throwing a shield around their capital.

3. Aggressive or high-risk investors

Aggressive investors are ready to ride the waves of risky investments in exchange for both lucrative rewards and certain losses.

You’ll identify them with these traits:

• Unfazed by the steep drops and uncertainty: Their portfolio might experience sweeping highs and gut-wrenching lows. Yet they are committed, eyeing the prize of better-than-average outcomes.
• Adept in trends and strategies: Always up to date about the Philippine Stock Exchange, global markets, and cryptocurrency markets, these investors have a firm grasp of fluctuating markets.
• Fortified by wealth and wisdom: Typically perched comfortably on a pile of wealth, they are confident with both their losses and gains because they have a buffer like cold cash — it cushions them against possible financial blows.

Which type of investments are suitable for aggressive investors?

These investors are on a relentless quest for high returns. Their portfolio may comprise a combination of the following:

• Growth stocks or the high flyers: With promising prospects, these investors explore new entrants that could outperform the market. The downside? These investors lose more if they don’t monitor these companies long-term.
• Venture capital: Here lies the domain of startups and nascent companies with potential. But there’s also the risk of loss since these companies are new entrants.
• Cryptocurrencies: With strong movements during the bull run, this arena is not for the fainted hearts. Others may ride the wave with day trading and swing trades, while those who treat Bitcoin like a hedge will be unfazed if they want to hold it for the long term.

What are the factors that influence risk tolerance?

Embarking on an investment journey raises questions like “How much risk can I handle, or how much am I willing to lose?”

Understanding your risk tolerance is finding that sweet spot for cautious optimism with your investments.

1. Time horizon

Generally, if you have a longer time horizon, you can afford to take on more risk because you have more time to recover from market fluctuations. Some investors don’t mind holding off their funds for more than five years since they have enough funds in their pockets as their portfolio grows.

2. Age

Younger investors are often encouraged to take on more risk because they have more time to recover from losses and potentially earn higher returns over the long term. As investors age, they typically become more risk-averse.

3. Portfolio size

Investors with larger portfolios may be more tolerant of risk. For them, a loss represents a smaller percentage of their overall assets. They may also have more funds to diversify and manage risk.

4. Comfort level

An individual’s comfort with uncertainty and market fluctuations plays a significant role in determining risk tolerance. Some people are naturally more inclined to take risks, while others may be more cautious.

This is also linked to the age factor — if you’re a family man, you’re more careful where to put your money if you’re feeding five people in your household versus a single young professional just starting to build his career.

5. Psychological factors

Psychological traits such as overconfidence, loss aversion, and mental accounting can affect an investor’s risk tolerance. Emotions like fear and greed can drive market fluctuations, where investors buy or sell stocks.

Fear, for example, can lead people to sell off investments during downturns. In contrast, greed will prompt aggressive investors to buy more in a bull market for higher returns but could be blindsided by other risks.

6. Knowledge and experience

Armed with financial wisdom and a few battle scars from markets, seasoned investors will be more likely to lean toward aggressive behavior.

Understanding the “hows” and “whys” of market movements can steel them to shoulder greater risks with a clear head.

So, what’s your risk tolerance?

When it comes to investing, individuals pirouette from conservative to aggressive, each showcasing a unique blend of temperament and financial acumen.

The conservative coalesces security with growth, moderate investors intertwine diversity with balance, and aggressive ones chase potential returns. Whether you’re a low-risk investor or an aggressive one, the bottom line is that you need to find ways to grow money instead of spending more.

No path guarantees success, but understanding one’s risk tolerance will help you make better decisions on where to put your money.

Which style of investment are you leaning toward?

Share your thoughts in the comments below.