Understanding Risk Tolerance: Are you an Aggressive or Conservative Investor? June 20, 2024

Understanding Risk Tolerance: Are you an Aggressive or Conservative Investor?

The S&P 500, a key benchmark for the US stock market, has experienced average declines of 34% during bear markets in 2020, yet it also surged approximately 114% from its March 2020 low1. These market fluctuations highlight the importance of understanding your risk tolerance which is crucial for developing an investment strategy to help you stay on course and not make any uniformed decisions in a market downturn.


What is Risk Tolerance?

Risk tolerance refers to the level of risk an investor is willing to accept, considering the fluctuations in an investment’s value2. It indicates your comfort level with accepting risk in pursuit of potential returns. Having a defined risk tolerance level helps to determine the types and allocation of investments suitable for you, given that all investment products carry different levels of risk.

Let’s consider two hypothetical investments, X and Y3:

– Investment X offers an average annual return of 3% with minimal risk to the principal value.
– Investment Y offers an average annual return of 7% but carries the risk of the principal value decreasing by 20% or more in any given year.

Here are some ways you can allocate your investment between these two options:

  • 100% in Investment X and 0% in Investment Y
  • 75% in Investment X and 25% in Investment Y
  • 50% in Investment X and 50% in Investment Y
  • 25% in Investment X and 75% in Investment Y
  • 0% in Investment X and 100% in Investment Y

While these options illustrate potential allocations based on varying degrees of risk, truly understanding your risk tolerance involves more than just selecting an investment ratio. It requires a comprehensive assessment of several personal factors.

However, understanding your risk tolerance is not as simple as it seems. It’s also influenced by various factors, including:

Time Horizon: How long do you plan to invest your money?

Financial Goals: What are your specific financial objectives? Are you saving to buy property, retire, or fund your education?

Current Financial Health: What is your income, savings, and debt situation?

Psychological Factors: How well can you remain calm during market fluctuations?

By reflecting on these questions, you can gain a clearer understanding of your risk tolerance. Nevertheless, gauging your exact risk tolerance can be challenging, as you might not be fully aware of your risk appetite until you encounter real losses.


Refining Your Investment Strategy

Once you have a clearer understanding of your risk tolerance, the next step is to determine what type of investor you are. This classification not only helps in choosing the right investments but also in structuring a portfolio that aligns with your financial goals and comfort level with market fluctuations.


What Type of Investor are you?

Investors can generally be categorised into three spectrums based on their risk tolerance:

Aggressive Investors are willing to take higher risks to maximise potential returns.

Moderate Investors balance opportunities and risks by having a mixture of high-risk and low-risk products in your portfolio.

Conservative Investors accept little to no volatility in their investment portfolios, usually opting for safer options such as savings bonds and money market funds.

Depending on your investment profile, you might be looking for opportunities to optimise your asset allocation or seeking lower-risk investment options to safeguard against market volatility. For those awaiting the right opportunity or preferring to minimise risk, consider a solution like SMART Park.


Try SMART Park: A Safe and Smart Way to Grow Your Idle Cash

SMART Park is an Excess Funds Management Facility that offers an effective way to manage your idle cash. It automatically invests your idle cash into one of the largest retail Money Market Funds (MMFs) — the Phillip Money Market Fund (PMMF)— on a discretionary basis.

Available in two currencies, SGD and USD, PMMF invests in high-quality, short-term instruments, including government and corporate bonds, commercial bills, and fixed deposits. You can visit PMMF(SGD) and PMMF(USD) to learn more about their performance and underlying funds.

By placing your money in SMART Park, you could earn competitive returns of 3.26 % for SGD MMF and 4.65% for USD MMF4 (Check prevailing rate here). Most importantly, SMART Park offers high liquidity with no lock-in period, allowing your money to earn potential returns while remaining readily available. It is important to grow your money, in a SMART and secure way rather than letting inflation slowly erode your hard-earned savings. Discover how SMART Park can assist you in achieving your financial goals with peace of mind here.

Ready to watch your money grow? Opt in to SMART Park now!


Reference:

Disclaimer

These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products.

Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance.

Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

About the author

Debbie Liew
Digital Marketing Executive

Debbie is currently with Digital Channel, specialising in promoting financial solutions such as Excess Fund Facility (SMART Park), Robo (SMART Portfolio), Finance Fit and Phillip Protect. Passionate about both digital marketing and finance, Debbie is dedicated to creating engaging content that benefits investors.

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