Based on the results of our risk profile test, there are 5 main risk profiles corresponding to different investing styles. Here, we’ll take a look at all investment risk profile examples, their descriptions, recommended asset allocation and illustrative investment examples.
In this post:
Very Conservative Risk Profile
This profile is ideal if you are a cautious person by nature or if you are a first-time investor with little to no experience. It is also appropriate if you have a short investment horizon and will need the money sooner rather than later.
People with a very conservative investment style focus on portfolio stability and conservation of capital. Their main concern is that they don’t end up losing money to inflation or to risky investments that don’t go as planned. They don’t want to beat the market. They might not even be interested in keeping up with it because of the inherent risk of a market downturn.
If you feel that a very conservative profile is the best option for you, then you want to focus on safe investments and steer clear of volatile ones. This means that most of your money will be tied up in cash or cash equivalents and low-risk bonds. Only a small percentage will go to risky investments such as stocks.
You could arrange your portfolio as follows:
- 30% cash and cash equivalents
- 50% low-risk bonds
- 20% stocks.
Of the 20% that goes into stocks, you could put 10% into large companies, 5% into middle-sized companies, and 5% into international stock markets.
The good news is that the portfolio will almost certainly not lose money because most of your investments will be tied up in fixed-income securities. In fact, you can expect a fixed paycheck at the end of each month.
Here are a few examples of the type of investment options that might interest you:
- US Government Bonds, which include Savings Bonds, Treasury Notes, Treasury Bonds, and Treasury Inflation-Protected Securities.
- Municipal bonds, which offer tax advantages and extremely low risk.
- High-yield savings accounts and certificates of deposit. You can check out the Ally Bank Online Saving, Citi High Yield Savings, and Marcus by Goldman Sachs High Yield Savings.
- Bonds of large companies. Like governments, corporations borrow by issuing bonds. Very conservative investors will want to stick to bonds with bonds that have the highest ratings, usually AAA or AA..
- Bond funds, which can either be mutual funds or exchange-traded funds. One of the main benefits of investing in funds is diversification, which protects your investment better than sinking all your eggs into a single basket.
If you are going to go with a fund, you would do well to do your research. If you want to take the easy road, then go with a well-known name. For instance, the Vanguard Group is a titan when it comes to cheap index-based funds. The company has been around for almost 50 years, and they’ve always had a passive approach to investing, which should explain their low fees.
Don’t worry: when it comes to investing, sometimes a passive approach outperforms an active one.
Here is a list of short to medium-term bond funds that might interest you:
- Fidelity US Bond Index Fund, Ticker: FXNAX
- Vanguard Short-Term Investment Grade Fund, Ticker: VFSTX.
- Vanguard Tax-Exempt Bond Index Fund, Ticker: VTEAX
All of these funds focus on minimizing volatility, which makes them ideal choices for very conservative investors.
Conservative Risk Profile
This profile is ideal if you are a cautious person yet willing to take on a modicum of risk. It is also perfect if you have a short to medium investment horizon.
People with a conservative investment style focus on minimizing loss and increasing the size of their portfolio. They want to make money so long as the risk of loss is minimal. They are swinging for singles, not home runs. They may not wish to beat the market, but they don’t want to lag too far behind it either.
If you feel that a conservative profile is the best option for you, then you want to put the majority of your capital in safe investments but also invest a little money in risky assets.
You could arrange your portfolio as follows:
- 20% cash or cash equivalents
- 40% bonds
- 40% stocks
Of the 40% that goes into stocks, you could put 15% into large companies, 10% into middle-sized companies, 5% into small companies, 5% into international markets, and the remaining 5% into emerging markets.
There is a very small chance that such a portfolio could lose money in the short term if market conditions are bad, but in the long run, that probability is almost negligible.
If you feel that a conservative style best suits you, then here is a list of investment options that you should look into:
You could look at the secure investment options suggested for very conservative investors. In addition to those, you might want to explore some extra options. When it comes to fixed-income securities, you might try investments similar to these:
- SPDR Portfolio Mortgage-Backed Bond ETF, Ticker: SPMB
- iShares Broad USD High Yield Corporate Bond ETF, Ticker: USHY. You’ll notice that, unlike very conservative investors, you can afford to invest in high-yield bonds so long as you are protected by a diversified portfolio.
- An alternative investment that might be interesting is peer-to-peer lending. You should check out Funding Circle, Peerform, Prosper, or LendingClub.
And, if we are going to put stocks into the mix, what better way to do that than through funds as well.
- T. Rowe Price Personal Strategy Income Fund, Ticker: PRSIX
- Vanguard Tax-Managed Balanced Fund, Ticker: VTMFX
There are many other funds that you may wish to consider. Be sure to check the fees and read up on the basics of mutual fund investing.
Balanced Risk Profile
This profile is ideal if you are willing to accept some level of risk in return for portfolio appreciation. On the other hand, balanced investors are not willing to forego portfolio stability altogether, so they will usually choose to err on the side of caution.
Balanced investors will look for growth opportunities while trying to minimize loss. You will want to some more aggressive investments but you will also want to diversify your portfolio to control risks. At the end of the day, a balanced investor would like to keep up with the market and share in the gains that come with a bull market.
If you feel that this describes you and your investment goals, you could arrange your portfolio as follows:
- 5% in cash and cash equivalents
- 40% in bonds
- 55% in stocks and equities.
Of the 55% that goes into stocks, you could put 20% into large-cap stocks, 15% into mid-cap stocks, 5% into small companies, 10% into international markets, and 5% into emerging markets.
You should bear in mind that this portfolio might lose money in the short run, and there is a small possibility that it will also lose money in the long term.
With that said, here is a list of investment options that might be of interest to a balanced investor:
Start by checking some of the sample investments given to conservative investors. You might find that the bond and mutual funds over there are appealing. You should also take a look at the alternative investment options mentioned there, including P2P lending.
You might also choose to invest in individual stocks, in which case you will want to find a reputable brokerage to work with. You can use different platforms to make different investments. For instance, if you want to invest in the US stock market, then you might go with Fidelity Investments. Alternatively, if you’re looking to invest in international markets, then perhaps Interactive Brokers is the way to go. And, if you want to find the best platform to get into ETFs, then check out Charles Schwab.
And, if you’re looking for funds, then balanced funds might be the way to go. Some excellent examples of balanced funds include the following:
- The Vanguard Balanced Index Fund, Ticker: VBIAX
- Fidelity Freedom 2045 Fund, Ticker FFFGX. This is a target date fund, making it also suitable for conservative investors.
- CIBC Atlas Income Opportunities Fund, Ticker: AWIIX
- T. Rowe Price Capital Appreciation Fund, Ticker: PRWCX
Balanced funds try to achieve a desired stock to bond ratio, and whenever the market upsets that ratio, the fund automatically rebalances to arrive back at the desired ratio.
Aggressive Risk Profile
This profile is ideal for you if your main goal for investing is portfolio appreciation over time.
People who fall into this category tend to be experienced equity investors, and they can stomach the volatility that comes with the market. They are even fine going through downturns because they know that things are bound to turn around eventually.
In return for the risks they take, aggressive investors expect superior returns over the long-term. Moreover, their investment horizons tend to be longer than 10 years.
While aggressive investors may put their money in different asset classes, the majority of their portfolio is focused on stocks.
You could arrange an aggressive portfolio as follows:
- 5% cash and cash equivalents
- 20% bonds
- 75% stocks.
Of the 75% that goes into stocks, you could put 25% into large-cap companies, 15% into medium-sized companies, 15% into small companies, 10% into international markets, and 10% into emerging markets.
When investing in stocks, it is usually best to diversify rather than focusing on a few key assets. Diversification spreads your risk and lessens the likelihood that any single stock will lose you a great deal of money.
However, if you insist on investing in individual stocks, then you need to make sure you know what you are doing and that you have vetted each investment before putting a single cent into it.
With that said, here are a few examples of the type of investments that might interest you:
- The Vanguard Strategic Equity Fund Investor Shares, Ticker: VSEQX. This is a mutual fund that pursues capital growth and invests in small to mid-capitalization companies.
- The Janus Henderson Enterprise Fund Class T, Ticker: JAENX. It seeks capital growth by investing half of its worth into medium-sized companies.
- Lord Abbett Developing Growth R6, Ticker: LADVX. This fund pursues long-term capital gain through investing in a collection of small-cap companies.
Another way to beat the market is to invest in high-yield bonds. These tend to be riskier than normal bonds, which explains their higher returns. To offset their risk, you can invest in a fund, be it mutual or exchange-traded. Here are a few examples:
- iShares iBoxx $ High-Yield Corporate Bond ETF, Ticker: HYG. This is a widely traded ETF that focuses on high-yield bonds. Its portfolio is filled with corporate bonds that are less than investment grade.
- Vanguard Emerging Markets Government Bond, Ticker: VWOB. This is a low-cost ETF that places its money in emerging markets bonds. It tracks the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
Aside from stocks and bonds, aggressive investors might want to look to invest in different asset classes, including commodities.
- For instance, you can invest in the Invesco Balanced-Risk Commodity Strategy Fund Class A, ticker: BRCAX. This fund will expose you to a broad basket of commodities.
- Another option is investing in real estate investment trusts, or REITs for short. You can check out Federal Realty Investment Trust, Essex Property Trust, and Realty Income.
All of these funds provide more aggressive, growth-oriented holdings while retaining the diversification of mutual funds. You may want to hold individual stocks as well, but you will want to look into the basics of researching and choosing stocks before you commit.
Very Aggressive Risk Profile
This profile is ideal if you want to crush the market and to achieve significant portfolio appreciation over a long period of time.
Obviously, very aggressive investors are comfortable with large swings in the value of their portfolio. They understand that it is the nature of the beast.
Moreover, their investment horizons tend to be long. In other words, they may decide at the outset to leave their money untouched for 15 years, if not more.
If you feel that a very aggressive risk profile is right for you, then you will put most of your money in stocks, and the more experienced of you might venture out into options trading and other forms of derivatives.
You could arrange your portfolio as follows:
- 5% cash or cash equivalents
- 10% bonds
- 85% stocks
Of the 85% that goes into stocks, you could put 20% into large companies, 20% into medium-sized companies, 20% into small companies, 15% into international markets, and 10% into emerging markets.
A portfolio like this is liable to lose money in a market downturn, but over a long period, it will most likely appreciate in value.
Here is a list of investment options that might interest you:
For starters, you can look at the examples provided to aggressive investors.
Additionally, there are a few more asset classes you could explore.
For example, you can look to venture capital funds. These present very high-risk, very high-reward opportunities. You also may need to put up a large investment up front. Some of the most successful venture capital funds over the past year have been Intel Capital, Kleiner Perkins, and Accel.
Another risky area where you could make good money is currency trading. However, this is a very fast-paced environment, and if you don’t know what you are doing, you could easily lose a fortune.
If you have the knowledge and the experience, you can buy derivatives, which are tools that amplify both your risks and your potential rewards. You can buy options, futures, or CFDs. To that end, you might want to use an online trading platform such as E*TRADE or Charles Schwab.
The examples here are opinions of the author, and they do not constitute investment advice. They are not recommendations and are not meant to urge you to buy these products. Instead, they are meant to illustrate the type of products someone with your risk profile should be looking at. FinMasters is not liable for any losses you might incur if you invest in these securities or funds.
Talk to a professional before making any large financial decisions.
What do you think of our investment risk profile examples? Do you agree or disagree with some of the examples we provided? Let us know in the comments below!