What type of investor are you?

Investing is like playing a video game. It comes with its own set of rules, demanding smarts and strategy. Similar to any game, there are wins and losses, and just like picking your character in a game matters, here, your choices impact your financial future. However, unlike typical games, this involves real risks influencing your money.

In the world of investing, everyone has their own goals and behaviour towards risk, shaping their character in this financial game. Are you someone who loves adventure and taking risks, or are you cautious, preferring a safer approach?

Every investment involves a certain level of risk. Understanding your investment personality helps you make smarter decisions, aligning your investment portfolio with your unique needs. This involves considering your tolerance to risk, and in this article, we will help you discover where you stand.

What is risk behaviour?

An investor's risk behaviour refers to how much they can handle investment risks and the chance of loss to reach a particular long-term financial goal. Let's elaborate on this concept for you:

If you have a high risk tolerance, you're open to the possibility of losing some money for the chance of substantial gains in the future. On the other hand, if you have a low risk tolerance, you prefer not to lose much money or any amount at all.

What determines your risk tolerance?

Your ability to take risks is connected to 2 important factors:

1. Risk capacity: This reflects your capacity to take risks and endure a financial loss without threatening your financial stability or goals. This aspect is influenced by factors such as your financial situation, assets, age, and investment goals.

2. Risk perception: This refers to your outlook on risks, including how you feel about the possibility of financial loss and your acceptance of that scenario.

Younger investors often lean towards taking more risks because they have the advantage of time to recover from losses or market downturns. While older investors tend to opt for a low-risk approach because they prioritise preserving capital. If you have a short-term investment strategy and are looking for quick gains, you're likely comfortable with taking risks. However, if your investment strategy is long-term, focused on achieving steady and modest returns every year, you're likely someone with low risk tolerance.  

What are the different types of investors based on their approach to risk?

There are 5 risk tolerance levels to consider, and it's important to identify which level aligns with you. This will help you select investments that best suit your preferences. Let's explore them together:

1. The risk-averse investor

If you fall into this category of investors, you're someone who is not willing to take any risks with your money. You prefer investments with no risks, even if it means lower returns. Your top priority is safeguarding your capital, and you're willing to accept low returns as long as your money is secure.

As a risk-averse investor, you might find comfort in options like term deposits, certificates of deposit, and savings accounts.

2. The conservative investor

If you identify as this type of investor, you approach investment cautiously and look for stability. However, you also aim for some returns, so you're willing to bear a modest level of risk to enhance your overall long-term gains. You prefer an investment portfolio primarily consisting of interest-bearing assets, with a small allocation dedicated to growth assets. This portfolio is tailored for investors looking to preserve their capital while aiming for modest returns.

3. The moderate conservative 

If you're a moderately conservative investor, you aim to see the growth of your investments and generate profits in the long or medium term. However, you also want to avoid substantial losses. In this scenario, you're comfortable taking a moderate amount of risk to attain a balanced profit level.

4. The moderate growth investor

You belong to this category if you aim for high returns and understand that to do so, you need to be ready to take on more risks for better results in the long or medium term. You also accept market fluctuations that may lead to capital loss as long as any potential losses are reasonable.

5. The growth investor

You fall into this category if you're open to taking risks in your investment portfolio. You're ready to navigate market ups and downs and accept the potential for capital loss if it means substantial gains over the long term, especially through investments in an equity portfolio.

It's important to understand that you can belong to different categories at the same time or at various stages of your life. As your financial goals shift, your willingness to take risks may also change. 

Lastly, remember the importance of balancing your risk tolerance with your investment goals. This ensures that your investment strategy aligns with your financial goals.

Have questions about investments and the available options at Bank al Etihad? Our Wealth Management Department is here to help you!