Friday, July 16, 2010, AM | Leave Comment
We all want the biggest return – whatever that means – on our investments. If you want 30%, 40% or 50% return on your investments – those were the good old days, don’t you think so? -, then you must be prepared for potential losses of the same magnitude.
However, a wise man once said: “Never buy a fund based only on its performance for the past year.” If you want bigger returns, you must be prepared to incur bigger losses.
The funds with the best chance of giving you bigger returns are pretty risky. You must be the kind of person to tolerate bigger risk.
To find out, take a risk-assessment test offered by some brokers, financial planners and authors. You can’t possibly choose the right mix of funds until you complete such a self-assessment.
There are different types of investors but experts define them in three main categories:
If you want regular income and like to build your wealth gradually, then you are a conservative investor.
That means you are not willing to accept a double-digit loss in a single year.
In other words, you are trying to play it by the rules. You are not willing to go way over your head.
If you can tolerate some risk but not very high and want both growth and income, you might be considered a moderate investor.
In other words, you are trying to play it by the rules but once in a while, you can go over your head but by not much just a notch.
If your risk-tolerance is quite high and you don’t care for regular income but growth and more growth is your mantra, then you are an aggressive investor.
In other words, you want to go way over your head. You are willing to accept bigger losses. [I don’t think anyone would accept bigger losses no matter how aggressive an investor is.]
In any case…
Before you invest, call the fund and ask about its holdings.
- Are they the kinds of securities you want to own?
- Do they accurately represent what type of investor you are?
- Do they accurately represent the impression you had from the fund’s name?
- If you already own the fund, is it still investing the way you were led to believe?
In a Nutshell
Do a risk-tolerance self-assessment. Find out what type of investor you are. However, humans change. Today you are conservative, tomorrow you may turn out to be moderate-to-aggressive investor.