Investment portfolio construction is very much equal parts science and art. In today’s investment marketplace, it has become exponentially more complicated with a dizzying array of options to pick from. One of the biggest pitfalls that many investors fall into is chasing performance. There is no denying that historical performance is an important factor when picking investments for a portfolio, but when it is used as the primary driver of choice, it can quickly translate into disaster. Here are a few things to think about when considering aggressive vs. conservative investments.
Identifying Your Investment Time Frame & Risk Tolerance
Measuring investment time frame and risk tolerance is the scientific part of analyzing one’s needs.
At the bare minimum, one should always consider their investment time frame:
- Short-Term (1-3 years)
- Intermediate-Term (3-10 years)
- Long-Term (10-30 years)
- Very Long-Term (30 years+)
The next most important factor that should be taken into consideration is your risk tolerance: conservative, moderate, or aggressive.
It may not always be that one falls perfectly into each time horizon or risk category, which is okay. This is where planning and creativity can fill the void.
Types of Portfolios
Typically, aggressive investments are best for investors who aim for the highest possible return. However, they must have both a high risk tolerance and long time horizon. A very aggressive portfolio may also be entirely composed of stocks.
Conservative investments help short-term funding and are best for investors who are more worried about preserving their money. A very conservative portfolio may have a mix of 20% stocks and 80% bonds.
However, there really is no one-size fits all answer when it comes to investment planning. An experienced financial planner will take into consideration multiple different factors beyond the risk tolerance and investment time frame, such as the clients’ current and projected future tax rates, cash flow demands, Traditional IRAs/Roth IRAs/taxable accounts, capital gains vs. interest/dividends, and family legacy planning.
Why work with a financial planner in my investment portfolio?
A financial planner’s ability to know their client’s goals, objectives, and investor psychology are going to be the big value-added propositions that an investor should take into consideration when weighing the pros and cons of paying for professional advice. Our wealth management team can help you decide whether an aggressive vs. conservative investment is right for you.
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