One primary point of distinction between the two is their risk profile. However, other factors come into play. Let us understand these classes of stock investors and how they build their portfolios.
Who is an aggressive investor?
Aggressive investors are typically those who are willing to take more significant risks. They are attributed to having a high tolerance towards the ups and downs of the market. Such investors are young and have just started on their investment journey. This gives them years to benefit from the compounding effect. The young age is also a reason for them being less risk-averse. Aggressive investors believe that any market crash shall recover and will eventually yield higher returns. Their aggressive portfolios are aimed at rapid growth and maximization of returns.
Their portfolios usually include asset classes that have high risk. These can be commodities as well as the securities of less well-known companies. These are considered overly risky because such companies are still in a growing phase and can turn unsuccessful with time. Further, it involves high-risk, high-return equity and mutual funds. If you are investing aggressively, remember to rebalance your portfolio regularly. This involves keeping a close eye on the performance of the stocks or any fluctuation in the market.
To understand the difference between a portfolio management service and mutual funds, read our blog here.
Such an investment strategy is suggested only for young individuals. If you are an older investor and want to keep your principal funds intact, then it is advised that you consider investing conservatively.
The mark of conservative investors is that they prioritise preserving their principal sum over maximizing profits. Such an investor has a low-risk tolerance and often chooses stable returns over potentially high ones. If you have chosen to invest conservatively, then chances are that you need to see results in a shorter period.
Typically, a conservative portfolio will include safer investments such as fixed deposits, debt funds, cash, and bonds. It may also include larger, well-established “blue-chip stocks” that are known to have sure-shot returns. Read more about investing in blue-chip stocks in our blog here.
Overall, conservative portfolios are relatively unlikely to experience dips or significant losses in the event of a market crash. This provides a safety net and gives a sense of security for the amount invested by you.
Now that you have better clarity over the two kinds of investors and how they choose to invest, let us find the right approach for you.
If you are confused about your investment approach, these few factors can give you a better idea of moving ahead.
A conservative portfolio makes sense when:
- You are risk-averse. This could be due to a load of financial responsibilities on you.
- You have a shorter investment period that does not allow you to manage fluctuating returns. As a thumb rule, this period is taken as less than 3 years.
- You do not prioritize high returns. A medium return on your investment is sufficient as long as it preserves your capital.
Let us take a few examples.
If you are a young parent, you may want to invest conservatively to build a college fund for your child. They might need this money in a couple of years to ensure that your investment has sufficient time to brave uncertain market plummets.
On the other hand, if you are nearing retirement, you may want to monetize your current income by choosing low-risk investments. This shall help you build a pool of savings that you can benefit from in the years when you do not have a steady flow of income. One way to build your conservative portfolio is by investing in short-term government assets such as T-bill5s. Moreover, you can put your money in short-term money market instruments such as Certificates of Deposit or even safe investments such as FDs.
Let us now move on to the aggressive approach, which is the polar opposite of the conservative approach discussed above.
An aggressive portfolio makes sense when:
- You are a young individual with little added financial responsibility. This allows you to have higher risk tolerance.
- You are in no hurry to withdraw your funds. You have a long time horizon over which you can deal with the market’s volatility to create a positive return on investment overall.
- You desire higher returns over the long term.
Let us understand this better with an example.
You are in your 20s and have a high annual salary. This gives you an excellent opportunity to invest a portion of your savings into stocks and mutual funds. These are highly volatile investments that come with the benefit of exponential returns if you play your cards right.
You can also apply this strategy to a part of your entire portfolio. If you have a certain sum allocated just to benefit from the market fluctuations, you may take this up.
Investing adds a sense of control over our personal finance, which, when done right, is not only prudent but also liberating.
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Your monetary needs are bound to change with time. This also has a direct impact on your investment approach. Getting through college, joining your first job, getting married, having children, and finally getting retired are all significant milestones. You have separate financial and social responsibilities that affect your investment strategy at each stage. This makes it important to gauge your needs thoroughly before deciding between an aggressive or conservative portfolio. You may also take a middle ground where your portfolio is balanced. This shall give you more than average returns while keeping your investment safe.