Investor profiles: Determine what type of investor you are based on your risk tolerance
"Investing is tricky" - you will hear these words from both newbies and investment veterans.
As an investor, your goal is to maximise returns and minimise losses. To do so, determining your risk tolerance and, with that, your investor profile is crucial.
In this blog post, we will take you through what risk tolerance is, the different investor profiles and questions to help you decide which one best describes you.
Eager to dive in? We sure are!
What is an investor profile?
Put simply, investor profiles are a way to categorise investors based on their investment goals and desired risk/reward ratio.
It's important to note that investor profiles serve as more than a label. Instead, they can provide valuable guidance on where and how to invest. For instance, you can use your investor profile to decide how much to invest in altcoins, Bitcoin, stablecoins, crypto bundles , and other asset types.
Attesting to the usefulness of investor profiles is the fact that most financial advisers will determine yours before proceeding to give any advice. This is, in most cases, done through a questionnaire on information such as the funds you are able to invest, when you plan to withdraw your funds, what you want to achieve through investing, as well how you feel about risk. Age and other personal information are also requested sometimes as the stage of life you are in can decide which investment strategies are suitable for you.
What is risk tolerance?
Risk tolerance represents how willing you are to accept the outcomes of risks should they occur and is determined during the financial planning stage.
Before determining your risk tolerance, it is advisable to have a clear understanding of all the risks you might be taking on. If this is not the case, you might suffer a lot of stress and panic, which will, in turn, make you sell at the wrong time.
Many make the mistake of going into investing without knowing their risk tolerance, which has consequences that are not obvious until the market starts going down. Remember, when the market is booming, anyone can have a high-risk tolerance. But when the opposite is true, those who are unprepared suffer the most.
An investor can get a sense of his/her risk tolerance also through questionnaires. Along with that, taking a look at cases in which big portions of assets were lost is a great way to put your emotions related to risk to the test.
How does risk tolerance impact your investing?
In investing, the risks you are willing to shoulder very much affect the rewards you receive. In other words, those with a low risk tolerance will have to go for safer investments and settle for low returns. On the other hand, those with a high risk tolerance get to make investments whose outcome is unpredictable but potential return is high.
An example of risk tolerance in practice
As mentioned earlier, market crashes are when a person's risk tolerance becomes very clear if not defined yet. Just think of the latest market crash and investor behaviour that followed.
Those with low risk tolerance sold their assets as soon as the prices dipped, while those with high risk tolerance kept theirs and maybe even tried to capitalise on the market sell-off by buying more assets.
The different investor profiles based on risk tolerance
Once you know your risk tolerance, the next step is to decide what investor profile suits you best. The three most common ones are: conservative, moderate, and aggressive.
Conservative investors
For conservative investors, protecting their assets is a top priority. Therefore, they are usually willing to accept very low risks.
Conservative investors are somewhat comfortable with market fluctuations but only make investments which guarantee a positive and fixed performance (monthly or annually).
When building a portfolio as a conservative investor, over half of it should be dedicated to low-risk assets and only a small portion, if any, to high-risk assets.
A retiree is a very common example of a conservative investor, but of course, other risk-averse individuals fall into this category as well.
Do note that conservative investing may not earn you substantial returns, but at least what you invested will be safe.
Moderate investors
Moderate investors are comfortable with a moderate amount of risk. Their portfolios essentially represent a balance of asset protection and growth.
For a moderate investor, the perfect portfolio is one with an equal amount of low-risk and high-risk assets.
When it comes to market fluctuations, a moderate investor is not afraid of them as long as they are average. This attitude allows the investor to enjoy potentially higher returns over the long term.
Aggressive investors
An aggressive investor sees the growth of assets as more important than protecting them. For an aggressive investor, market fluctuations are seen as "part of the game".
The assets they invest in are often ones that showed high growth over a fairly short period. To spot those, aggressive investors need to be market and investment-savvy.
While definitely risky, this approach has the potential to bring high returns.
How to determine your investor profile?
The process of determining your investor profile can be quite challenging.
At first glance, you might think that you fit multiple profiles or none at all. That is why asking yourself the "right questions" regarding your investment knowledge, time horizon, objectives, and, most importantly, risk attitude is crucial. The answers you give to these questions will enable you to assign yourself the most-fitting profile and, according to that, decide which investment strategies will work best for you.
Below, you can find a set of questions and answers, along with explanations on which answer would be given by an investor belonging to a specific profile.
Note: Do keep in mind that the information provided might not be 100% accurate in your case. Investment decisions are very personal and depend on a number of factors.
Investment knowledge
Q: Which of the following best describes your investment knowledge?
A1: Very limited
A2: Moderate
A3: Extensive
The meaning of your answer:
Investment knowledge plays a big role in what and how you invest.
Investors with a conservative profile tend to have very limited investment knowledge; thus, investments with high risk are not suitable for them as they require extensive knowledge to understand what and why is at stake.
Investors with a moderate profile usually have moderate investment knowledge, meaning they are familiar with some investment strategies and the risks associated with them.
Investors with an aggressive profile have extensive investment knowledge and are continuously expanding it. They are familiar with most investment strategies and understand how the level of risk they take on affects their potential returns.
Investment time horizon
Q: When do you plan on potentially withdrawing 1/3 or more of what you have invested?
A1: in under a year or 1-3 years
A2: in 4-6 years
A3: in 7-9 years or in 10 years or more
The meaning of your answer:
The amount of time you set between making an investment and withdrawing what you have invested determines what investment strategy is suitable for you.
If your investment time horizon is quite short, under a year or 1-3 years, that means more conservative investment strategies are suited for you.
An investment horizon of 4-6 years means that you have some flexibility when building your portfolio and can consider investment strategies with a moderate amount of risk.
Aggressive investment strategies are for those with an investment horizon of 7-9 years or 10 years (possibly more), as their portfolio-building flexibility is quite significant.
Investment objectives
Q: What is your main objective when making investments?
A1: Creating a steady source of income without the need to grow investment value.
A2: Creating a source of income and growing investment value to an extent.
A3: I want my investments to grow in the long term.
The meaning of your answer:
An investment objective is a goal you want to achieve through investing. As different investment strategies help achieve different goals, you need to know what your goals are.
If your goal is to create a steady source of income without growing the value of your investment, conservative investment strategies can help you achieve them and keep the risks you face at a minimum.
Someone with a goal of creating a source of income and growing the value of their investment would go for moderate investment strategies. These do come with more risk but also provide an opportunity to grow what you have invested.
Long-term investment growth can be achieved through aggressive strategies. But, it's important to point out that these strategies involve more risk and require a long investment time horizon.
Risk tolerance
Q1: What is the amount of loss over a 12-month period you would tolerate?
A1: 0-3%
A2: up to 10%
A3: up to 20% or more than 20%
Q2: When making financial decisions, what is your major concern?
A1: always potential losses
A2: the potential losses and the potential gains
A3: the potential gains
The meaning of your answer:
Your risk tolerance is determined by the amount of loss you are comfortable with, as well as the concerns you have when making financial decisions.
Those who are very much concerned with the potential losses and would tolerate only a 0-3% loss are seen as conservative investors.
Moderate investors think about the potential losses and gains equally but will usually only tolerate a loss of up to 10%.
A loss of up to 20% or more than 20% is accepted by those who prioritise gains over losses. In other words, aggressive investors.
Finding investments fit for your profile
While knowing your investment profile does, without a doubt, make navigating the sea of investment opportunities easier, it can still be a challenge to know if you picked the right one(s) for you.
At SwissBorg, we acknowledge this challenge and believe we can aid in solving it with SwissBorg Earn.
SwissBorg Earn is a product we have been working hard on behind the scenes that will be launching this summer. With SwissBorg Earn, you will be able to customise your yield by choosing your risk and expected return. You can think of SwissBorg Earn as a tool to tailor your investments to your investor profile and earn crypto your way.
Sounds exciting? Keep following our blog to learn more!
Conclusion
Regardless of how confident you are as an investor, it is worth your time to define your risk tolerance and investor profile.
Once done, you can tailor your investment strategies according to your profile and achieve maximum success on your investment journey. Good luck!
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