Conservative and Aggressive Investing
In an earlier article, we read about Active and Passive styles of investing. In this article we see what Conservative and Aggressive styles of investing are.
Conservative Investing
The dictionary meaning of the word Conservative is “not taking unnecessary risks”. In investing parlance Conservative means to invest one’s capital in a manner that would ensure total protection to the capital, returns being secondary.
Investopedia defines Conservative Investing as “strategy that prioritizes the preservation of capital over market returns.” A Conservative investor has a low to moderate risk tolerance. (Risk tolerance refers to an individual’s willingness to withstand market volatilities.) Therefore, a Conservative Investor is not necessarily an elderly investor or a retired person. It can also be a young person who cannot mentally withstand too much market volatilities.
A conservative investor by definition is a person whose preference is safety of capital as compared to high returns on his investments. These investors don’t mind a slow steady regular return and a low to moderate growth in their corpus.
It is normally believed that a conservative portfolio has only debt instruments, but this is not necessarily true. In addition to traditional debt instruments a conservative investor may prefer to add equity component to his portfolio by investing in shares of large cap companies. This addition of equity in the core portfolio can give stability and growth which can take care of inflation to a certain extent.
The investment strategy in a conservative investing style is to invest the corpus mainly in low-risk fixed-income debt instruments such as treasury bills, deposits, Government bonds, etc and in large cap blue chip dividend paying companies in the case of equity instruments.
A conservative style of investing is normally recommended to be followed for elderly investors, especially those who have retired or those who are nearing retirement. As mentioned earlier the main reason is preservation of capital over getting good returns.
Aggressive Investing
The dictionary meaning of the word Aggressive is “determined to win or succeed and using forceful, action to win or to achieve success”. In investing parlance Aggressive means to invest one’s capital in a manner that would give maximum returns on investment.
Investopedia defines Aggressive Investing as “strategy that attempts to maximize returns by taking a relatively higher degree of risk.” An Aggressive Investor has a high-risk tolerance. (Risk tolerance refers to an individual’s willingness to withstand market volatilities.) A person who can mentally withstand wide volatilities and fluctuations can fit in the image of an aggressive investor. For him the priority is to earn higher returns than what the market can offer. So it need not necessarily mean a young person, it can also be an elderly person who has the capacity to withstand risks.
An Aggressive Investor by definition is a person who prefers higher return on his corpus as compared to safety of Capital. They don’t mind taking higher risk for earning a higher return.
An Aggressive Investor does not always have only equity instruments in their portfolio. An aggressive investor’s portfolio may also have debt components. An Aggressive Investor tends to select riskier debt instruments such as higher return paying but lower rated bonds, junk bonds and credit risk funds. (Credit risk funds are debt funds that invest 65% in low rated instruments. By taking greater credit risk they generate higher returns.)
An Aggressive style of investing is normally recommended to be followed for youngsters for whom retirement is a long way away. One of the main reasons for this is to create a bigger corpus by way of getting higher returns for goals that are far away into the future, such as retirement.
Moderate Investing
Moderate style of investing is one which borrows the best of both the Aggressive and Conservative style of Investing. The main purpose of this style is to reduce risks at the same time get higher returns.
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