Are you Conservative Investor? Think Again

Many investors think that they are conservative but in reality they are aggressive in their investment life when they focus their investments in the same company or industry where they work and generate their income. For instance, a medical representative invests only in pharma stocks, a civil engineer concentrates on reality space and a software engineer buys only IT stocks. That can make for a volatile mix and undue risk.

 

 If we run into those people who don’t think this concentration is a problem and suggest that they talk to investment real estate professionals about what happened to them in the early 2008 and late 2009 when the bottom fell out investment real estate market, or to computer system consultants after Y2K or to thousand of tech investors in the know who lost all or most of what they had in the dot.com bust. Also Read: Syndromes of Risk-taking Ability!

 

Nevertheless, some investors still will want to stay with same industry or company they know or in position with which they are grown comfortable, rather than adequately diversify. Even though I have seen it literally hundreds of times that many investors have been holding huge percentage of their money in a single stock for long years and think they are being conservative.

 

The Portfolio Issue

 

Many investors make the same mistake of assessing their overall risk on an investment-by-investment basis. If they are supposed to be extremely aggressive in the traditional sense, they want every position to be a highflier. On the other hand, if they are supposed to be traditionally conservative, they want every single investment to be conservative. But risk and reward should be managed at the portfolio level. Every investor should understand that he will never be happy with every single individual position in his portfolio or with every slice of his investment pie. After all, a diversified portfolio that is needed to be periodically re-located and re-balanced is the way to enhance returns and still reduce risk.

 

Keep emotion out of investment decisions

 

Theoretically, we all know that investing in equity is generally for the long haul and that, over time, markets go up. But the actions of very few people reflect that knowledge. Almost everyone says they are a long-term investor, but few act that ways. When the market turns in negative territory, many investors run for the exits and almost always suffer a double whammy i.e. the loss from a collapsed market and the loss from their newfound risk aversion.

 

Many investors could be likened to vegetables gardeners who are so concerned about how the carrots are doing that they dig them up daily and examine the roots. Then they wonder why they get wilted carrots and wilted investments. So, anyone ask them, “If you planted a garden and examined the roots every day, what would happen to your carrots?” So, it is imperative to know that both vegetables and investments need time to grow and flourish.

 

“A portfolio is like soap. The more you touch it the smaller it gets”

 

Conservative Versus Aggressive

 

As you have seen that becoming too conservative an investor after being burnt his fingers in a bear market is usually a misguided approach. The potential risk can be as or worse than risk associated with making a bold move. For example, a investor who is overly averse to taking investment risks could fall short of financial goals and dreams because he or she was not aggressive enough in investing.

 

In the real sense, conservative and aggressive are merely arbitrary labels with different meanings depending on one’s point of view. The definition depends on individual circumstances. For instance, an aggressive investor may become conservative with the death of his father even though his portfolio is unaffected.

 

Take another instance; a couple considers themselves conservative because they are taking so little risk with their current assets. Their portfolio is about 90 percent fixed incomes and their view of risk might be a major obstacle to accomplishing their long-term financial goals.  In that sense, it seems by definition conservative [investing] has to do with preservation. To date, their concern has been solely with preserving their assets as they are. In our professional opinion, we see them as aggressive because while consider they, being conservative is that, the probability of their succeeding in their financial goals is quite low.

 

Perhaps, the best definition of an aggressive investment stance, then, is one that has a low probability of achieving a person’s financial purposes and goals and also preserving that individual’s vision for the future.