conservative versus agressive investing

Once an individual has determined to begin an investment strategy the next step is to formulate a plan. During this stage of  the investment process people are generally faced with two basic options that can be arranged in a variety of combinations. They can build an investment portfolio that is fiscally conservative, or that tends to be more aggressive.

As the name would suggest conservative investments have a lower amount of associated risks. They generally avoid the wild vacillations that occur on Wall Street during certain economic conditions. Because conservative investments offer more stability, it might be tempting for some people to slant their portfolio in that direction. However, careful consideration should be taken before doing so. While it is true that the associated risks are lower it is also true that the potential for gains are lower as well. Perhaps the best example of a conservative investment is a bond. (or a bond fund). Purchasing a bond guarantees that your money will be repaid at a specified date, and that interest will be paid before the maturation date.

Aggressive investments , on average, produce much higher rates of return. However, they do not guarantee high returns, and in fact, they have a much higher chance of producing big losses in contrast to their conservative counterparts. Aggressive investments are typified by stocks that can be purchased and sold on the market. In recent years mutual funds have gained great popularity with investors. These investment vehicles bundle together multiple stocks, which diffuses some of the risks. If one of the stocks in the fund performs badly, it can be overcome by the other stocks.

Although there are a variety of opinions regarding the "perfect" investment strategy, there are a couple of commonly accepted principals.

• If an investor is young his portfolio should consist of a large portion of aggressive investments. Although the market has had occasional dips, (some of them quite severe) over a long period of time it has always gone up. Therefore, if you are young enough to ride out a potential drop in the market, then aggressive choices make sense.
  
  
• If an investor is getting close to retirement (or to his investment goal) his portfolio should begin to shift to more conservative investments.  A failure to do so could result in trouble if the market drops. For example, if the market drops severely it may not recover for a couple of years. If an investor was one year away from retirement then the funds will not recover by the time they are needed. He will then be faced with a very undesirable decision:  a) work past retirement or b) settle for less money.

It is important to point out that a portfolio does not have to be all or nothing. In fact it is quite common to have a mixture. When an individual is just beginning his investment activities it is generally recommended to have no more than 20% conservative holdings. The closer a person gets to reaching his goal the higher this percentage will become.  There is also one other factor that often comes into play, and that is a person. s aversion to risk. If a person has a very low tolerance for risk they may choose to have a higher percentage of conservative investments even if they are quite young. For this segment their peace of mind is more important than any potential monetary increase that may come through riskier choices.