Accepting some volatility can set the stage for long-term growth.
Most investors feel pretty confident when financial markets are on the rise and their investments are doing well. But how do you react when markets start to decline and your investments temporarily lose value? That may depend on whether you’re a cautious or confident investor.
You’re a cautious investor if…
You can’t stand the thought of your investments losing value, even for a short time. Caution is a good quality to have, because it means you’re less likely to take unnecessary risks. But financial markets go through normal ups and downs, and accepting that fact can make you a more successful investor over the long term.
Here’s why: If you tend to lose sleep over the thought of losing money, you’re probably inclined to avoid higher-risk investments like equities. You prefer bank accounts, money market securities or other ‘safe’ investments that are almost certain to retain their value.
It’s okay to invest some of your assets this way. But if all of your investments are in ultra-safe securities, you’re likely earning very little interest on your investments. It won’t be enough to help you grow your assets, outpace inflation and reach your long-term financial goals.
You’re a confident investor if…
Normal market volatility doesn’t faze you. In fact, you view market declines as a buying opportunity. You also don’t shy away from investing in higher-risk equities (say, emerging market stocks) or high-yield bonds, because you know that with higher risk comes the potential for higher returns. And you figure you can make up any losses over the long term.
Be careful, though, because being too confident also has its downside. If you’re investing only in higher-risk assets, your portfolio could suffer extreme losses that would require a significant market gain to recover from. Your ability to accept occasional losses is great, as long as you’re not taking on excessive risk.
Finding the middle ground
Caution and confidence are both essential qualities for an investor. A financial advisor can help you strike the right balance between the two, depending on your specific situation.
There’s an investment strategy for every investor personality type. Contact your financial advisor or visit AGF.com/RethinkRisk.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.