With the current turbulence in the stock market, this is a good time to take stock (pun intended) of your approach to investing and what success means to you. That is how you can best stack the odds in your favor.
There are two things you can do as an investor to accomplish just that: Stay disciplined and align your investing strategy and activities with your goals, your risk tolerance and your personal preferences and interests.
As an investor, discipline is a relatively easy concept to understand. It means having a system or process and sticking to it. That’s easier said than done, of course, but the concept is pretty simple. Some of the most important elements of investor discipline include:
- Have one (or a few) clear investing goal(s)
- Make sure every trade fits your goal
- Have a target price for exit and a system for taking partial profits along the way
- Have a clear and appropriate policy for cutting losses
- Don’t obsess about money you could have made if only …
- Don’t fall in love with a stock.
That’s what makes a disciplined investor.
Have a system and stick to it.
I can’t say it enough. Many investors are disciplined on their way into a trade but then fall in love with the stock or think they can force more profits by holding on. Responsibly getting out of your positions is just as important as getting into them. Stay disciplined.
I can write more about discipline, but you probably get the idea.
The main topic I want to cover today is how to understand and make use of your investor profile – your goals, your preferences, your risk tolerance, and your relevant personality traits. Understanding your personal risk tolerance, investing style and preferences is crucial for making informed decisions and achieving your financial goals.
This guide explores the factors that influence risk tolerance, different investing styles, and how to determine which approach best suits your needs.
We’ll also examine common investor profiles and provide an overview of Cabot Wealth Network’s advisory services to help you find the right investment strategy and resources for your unique situation.
Understanding Your Risk Tolerance
Risk tolerance is a fundamental concept in investing that refers to an individual’s ability and willingness to endure fluctuations in the value of their investments. It plays a crucial role in shaping investment decisions and portfolio construction.
Many factors contribute to your risk tolerance, not necessarily equally:
- Age and Time Horizon: Younger investors generally have a higher risk tolerance as they have more time to recover from potential losses.
- Financial Situation: Your financial stability, including income, debt levels, and emergency funds, affects your ability to take on risk. Proximity to foreseeable life events (such as having children, funding a marriage or education) may also affect your tolerance. Those with a stronger financial foundation can typically afford to take on more investment risk.
- Investment Goals: The specific financial objectives you are trying to achieve influence your risk tolerance. Short-term goals often require a more conservative approach, while long-term goals may allow for higher risk.
- Personal Comfort Level: Your general inclination towards risk-taking or risk-aversion plays a significant role in your investment decisions.
- Knowledge and Experience: Investors with more financial knowledge and investing experience may be more comfortable with higher-risk investments.
- Portfolio Size: The total value of your portfolio can impact risk tolerance, as larger portfolios may be able to withstand more volatility.
- Income Needs: If you rely on your investments for current income, you may have a lower risk tolerance compared to those investing purely for future growth.
- Market Conditions: Economic, political, and regulatory changes can affect your willingness to take on risk.
- Past Experiences: Previous negative experiences with investments can influence your current risk tolerance.
- Emotional Resilience: Finally, your ability to remain calm during market downturns affects your overall risk tolerance.
Understanding these factors can help you develop a more accurate assessment of your risk tolerance and create an investment strategy that best aligns with your personal interests, circumstances and goals.
Common Investor Profiles
Financial advisors often categorize clients into personas, or profiles, based on their risk tolerance, capacity, and behavioral tendencies. Understanding these profiles can help you identify your own tendencies and work more effectively with financial advisors. Here are the six main profile types and how advisors typically manage them:
1. Conservative Investors
Characteristics:
- Highly risk-averse, prioritizing capital preservation
- Prefer low-volatility investments like bonds, CDs, or money market accounts
- Shorter time horizon or reliance on investments for income (e.g., retirees).
Challenges: Fear of loss and reluctance to take risks can limit portfolio growth.
Advisory Approach:
- Focus on stability and income-generating investments, such as blue-chip and reliable dividend-paying stocks, ETFs, bonds
- Consider covered calls (a very simple options strategy) for added income/yield
- Educate about inflation risks and the need for some growth to maintain purchasing power
- Emphasize consistent returns and reassess and rebalance asset allocation regularly (suggest 1-4 times a year).
2. Moderate Investors
Characteristics:
- Balanced approach to risk and return
- Willing to accept some volatility for steady growth
- Medium-term time horizon (e.g., mid-career professionals saving for retirement).
Challenges: Striking the right balance between growth and safety.
Advisory Approach:
- Create diversified portfolios with a mix of stocks, bonds, and ETFs
- Regularly review and adjust portfolios to align with changing goals or market conditions
- Set realistic expectations.
3. Aggressive Investors
Characteristics:
- High risk tolerance, seeking maximum returns
- Comfortable with market volatility and long-term horizons (e.g., younger investors)
- Often invest in high-growth stocks, start-ups, or speculative assets
- Tends to find investing fun.
Challenges: Overconfidence or emotional reactions during downturns.
Advisory Approach:
- Focus on high-growth opportunities while maintaining diversification to mitigate risks
- Advanced options trading strategies as a hedge against risk and to capture gains
- Provide data-driven insights to counter overconfidence or impulsive decisions
- Encourage long-term thinking to avoid panic selling during market dips.
4. Low Engagement
Characteristics:
- Hands-off investing
- Fairly risk-averse
- Low engagement with the stock market and investing
- Understands the importance of investing but doesn’t take great enjoyment from it.
Challenges: Not responsive to changing market conditions, suboptimizes returns.
Advisory Approach:
- Focus more on passive investments - structured portfolios/ETFs, buy-and-hold stocks
- Review and realign asset allocation at least annually.
5. Competitive
Characteristics:
- Seeks big wins
- Not too concerned about volatility
- Risk tolerant
- High interest and engagement in the stock market and investing
- Finds investing fun.
Challenges: May not optimize overall returns.
Advisory Approach:
- Growth stocks, small-cap and emerging stocks
- Balance with some low-volatility stocks (value and income).
6. Flexible
Characteristics:
- Range of risk tolerance
- Tends to find investing intellectually interesting and fun, with moderate to high interest and engagement
- May have a preference for certain styles (growth, value, income) or sectors
- Seeking a combination of returns and safety.
Challenges: Trying to have it all.
Advisory Approach:
- Maintain a diversity of approaches and a diversified portfolio
- Identify any areas of particular interest and focus on those more
- Review and adjust asset allocation 2-4 times per year.
How to Use Your Profile
When you have determined which profile type seems the best fit for you, your next step is to determine what implications that has for your investing strategy and approach. Cabot Wealth Network offers a range of advisory services tailored to different investor profiles’ needs and preferences. Here’s an overview of our services, categorized by investor profile.
| Your Profile | Characteristics | Investing Approach | Advisory Services |
| Conservative | · Highly risk-averse · Prefer low-volatility investments · May prioritize income over growth (e.g., retirees) · Covered calls as a way to generate more income | · Dividend stocks · Consistent returns · Covered calls (options) | · Cabot Dividend Investor · Cabot Income Advisor · Cabot Retirement Club · Cabot Profit Booster |
| Moderate | · Balance risk and return · Accept some volatility · Intermediate time-horizon · Seek reliable growth | · Diversified portfolio · Set realistic expectations · Covered calls (options) · “Blue chip” stocks | · Cabot Value Investor · Cabot Turnaround Letter · Cabot Money Club · Cabot Stock of the Week · Cabot Explorer |
| Aggressive | · Maximize returns · Comfort with volatility · Longer-term time horizon · Accept volatility and risk | · Aggressive growth · Small- and mid-cap stocks · Options trading | · Cabot Growth Investor · Cabot Top Ten Trader · Cabot Small-Cap Confidential · Cabot Early Opportunities · Cabot Options Trader · Cabot Cannabis Investor |
| Low Engagement | · Long-term, hands-off investors · Not concerned with maximizing returns | · Buy and hold · Value and growth | · Cabot Turnaround Letter · Cabot Stock of the Week |
| Competitive | · Looking for big wins · Doesn’t want to miss out on a “hot” stock | · Aggressive growth · High activity and engagement following market | · Cabot Growth Investor · Cabot Small-Cap Confidential · Cabot Early Opportunities |
| Flexible | · Diversified, bit of everything. · Maintain flexibility · Adjusts as market shifts | · Blend of growth, value, and income investing | · Cabot Prime Pro · Cabot Prime Plus · Cabot Stock of the Week · Cabot Money Club · Cabot Explorer |
These services cater to a wide range of investor profiles, from conservative income-seekers to aggressive growth investors and active options traders. By offering this diverse set of advisory services, Cabot Wealth Network aims to meet the needs of investors with varying risk tolerances, time horizons, and investment goals.
Conclusion
Understanding your risk tolerance and preferred investing style is crucial for making informed investment decisions and achieving your financial goals. By considering factors such as age, financial situation, investment goals, and personal comfort level with risk, you can better align your investment strategy with your unique circumstances.
To help you understand your investing style, we’ve prepared a quick 10-question quiz that you can take by clicking here.
The various investor profiles discussed in this guide highlight the importance of tailoring investment strategies to individual needs. Whether you’re a conservative investor focused on capital preservation or an aggressive investor seeking maximum growth, there are investment approaches and advisory services designed to meet your specific requirements.
Cabot Wealth Network’s range of advisory services demonstrates how professional guidance can be adapted to different investor profiles, from growth-oriented strategies to income-focused approaches and specialized options trading services. By matching your risk tolerance and investing style with the appropriate advisory service, you can create a more effective and personalized investment strategy.
Remember your risk tolerance and investment needs may change over time based on your finances and preferences, market conditions, and timing of life events. So it’s essential to regularly reassess your approach and adjust your strategy as necessary. Whether you choose to work with a financial advisor or manage your investments independently, maintaining a clear understanding of your risk tolerance and investing style will help you navigate the complex world of investing with greater confidence and success.
For your investing success,
Ed Coburn
President, Cabot Wealth Network
