In the “worst day of 2019” for the market, the Dow Jones Industrial Average dropped 767 points by closing on Monday. When the market suddenly drops, investment portfolios will reflect not only the fluctuations but also the risks inherent in that particular strategy. All securities carry risk, but some investment products have more than others. Risk tolerance refers to the level of uncertainty in investment performance that is acceptable to the investor. An investor’s risk tolerance is reflective of their financial situation, needs, age, objectives, time requirements, and other considerations. Generally, investors can be categorized within varying levels of conservative, moderate, or aggressive. The types of investments in an investor’s portfolio should reflect their risk tolerance. The changes that investors noticed in their portfolio during market shifts could be indicative of where their portfolio falls on this spectrum.
Investors with the lower risk tolerances should have a conservative investment strategy in place that shields their portfolio from significant declines in market downturns. The goal of conservative investors is to prioritize principal protection and liquidity over risky appreciation. A conservative investment portfolio will be mainly comprised of safer, low-risk fixed-income investments, such as bonds and certificates of deposits. While low-risk investments do not generate the highest returns, the chances of losing principal are much lower. Older individuals closer to retirement should have investment profiles that reflect a more conservative investment portfolio. It is a huge red flag for any conservative investors to have noticed a complete decline in their portfolio from the market downturn.
Aggressive investment portfolios consist of substantially riskier investments that could potentially produce higher returns. However, these speculative investments come at the cost of potentially losing most or almost all of their principal. Younger investors with the time to recover losses are the demographic group that may be able and/or willing to weather a more aggressive investment strategy. Younger investors can usually benefit from saving as much as possible in retirement accounts in anticipation of the market’s eventual recovery and benefit from the compounding returns. However, investors of all ages who are more apt to want to sell at market downturns immediately should not be in this speculative investment strategy.