Understanding Your Investment Style

No matter what kind of investing you do - bonds, stock options, mutual funds, gold, commodities, real estate - in order to be successful you need to have a thorough understanding of your personal investment style. 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. 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 stocks 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 stocks, since stocks 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 stocks, 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 stocks, stock mutual funds, stock 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.