Profile of a Moderate Investor – Investment Personalities

There is no official or agreed-upon definition of a moderate investor (or any kind of investor). Investing is personal, and your ability to take risks depends on several factors. Even professional investment managers have differing views on exactly how much risk a moderate investor should take. However, moderate investors are generally described as “middle of the road” risk-takers. They are aware that the markets go up and down, and they’re okay with that — up to a point — if it means there’s potential for growth.

But a moderate investor is interested in growing money without losing too much. The goal is to balance out opportunities and risks, and the approach is sometimes described as a balanced approach. To grow investments, you’ll need to tolerate the ups-and-downs of stock markets. You can reduce that volatility and attempt to avoid major losses by using an investment mix that includes more stable investments.

If a moderate investor were to describe herself, here’s what you might hear:

I am a moderate investor. I want to invest in the stock markets, because I believe that I will be rewarded for taking some risk in the markets, but I don’t want to get too crazy. As a result, I’d like to take the “middle of the road”: not too aggressive, not too conservative. I know that my account value will go down occasionally, but I belive that over long periods (10 years, for example) the risk will pay off.

Investors often say “I want high returns with a low level of risk.” Unfortunately, that’s impossible. Diversification can certainly improve your chances, but you ultimately need to decide if you want one or the other (or if you’re happy with a moderate level of risk).

Moderate Investment Mix

BalanceModerate investors, also known as balanced investors, typically use a mixture of stocks and bonds. They might be roughly 50/50 or 60/40. That is: 60% of their assets might be in stocks (large companies, small companies, overseas stocks, etc) while 40% of assets are in bonds (including government and agency bonds, corporate bonds, high-yield bonds, foreign issues, etc).

A moderate portfolio model typically looks like:

  • 20% Large-cap
  • 8% Mid-cap
  • 8% Small-cap
  • 20% Overseas developed nations
  • 4% Emerging markets
  • 40% Diversified fixed-income

This approach gives them a decent amount of exposure to the stock market without the risks of a 100% stock portfolio. The bond portion helps to smooth out the ups and downs of the stock market, and can provide some income and “total return” (all of which might be reinvested for future growth).

You can also have somebody else diversify your money for you. Target-date funds and target risk funds invest in numerous investments (while you only select one investment). They may even be called “moderate” funds — but it’s worth examining the underlying investment mix to make sure it meets your needs.

Risks of Being a Moderate Investor

A moderate portfolio is designed to balance out risks, but still accept some risks. Because roughly half of the portfolio is in the stock market, investors can still lose substantial amounts of money when the market goes down. Moderate investors can also have either too much or too little in stocks. For an investor who is willing and able to take more risk, perhaps they should have more than half of their portfolio in the stock markets (with the hope of getting more growth and outpacing inflation). A different investor, who is less able to tolerate risk, is probably pushing it by having half of their money in stocks. Just because something is 50/50 doesn’t mean it’s a good mix. Why not 70/30 or 30/70?

Finally, balanced investors need to remember that bonds are not risk-free investments. In 2008, for example, balanced funds suffered badly, as both the stock and bond portion of these portfolios lost value. In addition, even “safe” bonds can lose money when interest rates rise.

Other Types of Investors

Moderately aggressive (or just aggressive) investors are higher-risk investors than moderate investors. Those investors own even more stock, and they’re willing to put up with even more market volatility. Of course, the only reason to to so is the hope of better returns over the long term.

Moderately conservative investors are lower-risk investors. They prefer to reduce volatility even more, so they have higher allocations to bonds, cash, and other investments that don’t behave exactly like stocks.

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