There are countless investing strategies and styles available to investors, but one piece of advice encompasses all of them: Have a system or process and stick to it.
When the market enters periods of high volatility (both to the upside and the downside), that advice is doubly important.
When the market is flying high, fear of missing out (FOMO) entices investors to abandon their systems to chase even greater returns. Conversely, during steep corrections, the fear of loss pushes investors to abandon their systems in favor of safety.
The motivation couldn’t be more different, but the result is the same: Investors end up moving away from their strategy at the time that they need it most.
If you find yourself drifting away from your core strategy, there are a few questions you can ask yourself to see if you may be getting too far afield:
- Do you have one (or a few) clear investing goal(s)?
- Does every trade fit your goal?
- Are you adhering to your target prices or taking partial profits along the way?
- Are you honoring your stop-losses or exit strategies?
It’s also important to remember that 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.
One way that you can improve your investing discipline is by making sure that your strategy aligns with your mindset.
Understanding your personal risk tolerance, investing style and preferences is crucial for making informed decisions and achieving your financial goals.
To help you make sure that you’re staying on track, today I wanted to explore 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.
Know 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.
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.
Using 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 | · Dividend stocks | · Cabot Dividend Investor |
| · Prefer low-volatility investments | · Consistent returns | · Cabot Income Advisor | |
| · May prioritize income over growth (e.g., retirees) | · Covered calls (options) | · Cabot Retirement Club | |
| · Covered calls as a way to generate more income | · Cabot Profit Booster | ||
| Moderate | · Balance risk and return | · Diversified portfolio | · Cabot Value Investor |
| · Accept some volatility | · Set realistic expectations | · Cabot Turnaround Letter | |
| · Intermediate time-horizon | · Covered calls (options) | · Cabot Money Club | |
| · Seek reliable growth | · “Blue chip” stocks | · Cabot Stock of the Week | |
| · Cabot Explorer | |||
| Aggressive | · Maximize returns | · Aggressive growth | · Cabot Growth Investor |
| · Comfort with volatility | · Small- and mid-cap stocks | · Cabot Top Ten Trader | |
| · Longer-term time horizon | · Options trading | · Cabot Small-Cap Confidential | |
| · Accept volatility and risk | · Cabot Early Opportunities | ||
| · Cabot Options Trader | |||
| · Cabot Cannabis Investor | |||
| Low Engagement | · Long-term, hands-off investors | · Buy and hold | · Cabot Turnaround Letter |
| · Not concerned with maximizing returns | · Value and growth | · Cabot Stock of the Week | |
| Competitive | · Looking for big wins | · Aggressive growth | · Cabot Growth Investor |
| · Doesn’t want to miss out on a “hot” stock | · High activity and engagement following market | · Cabot Small-Cap Confidential | |
| · Cabot Early Opportunities | |||
| Flexible | · Diversified, bit of everything. | · Blend of growth, value, and income investing | · Cabot Prime Pro |
| · Maintain flexibility | · Cabot Prime Plus | ||
| · Adjusts as market shifts | · 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.
To help you understand your investing style, we’ve prepared a quick 10-question quiz that you can take by clicking here.
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.
By matching your risk tolerance and investing style with the appropriate advisory service, you can create a more effective and personalized investment strategy.
If you’ve been consistently using one type of strategy for a while, remember to periodically reassess your approach and adjust your strategy as necessary.
After all, strategy needs, income, market conditions, goals, and investing horizon all change over time.
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.
