Of all the factors you should consider when developing your plan, two of the most important are your investment objective and risk tolerance.
All investors have objectives or goals, such as seeking income, growth & income, growth, trading, or speculating. All investors also have risk tolerance, which is the amount of risk of loss they are willing and able to tolerate in order to achieve their investment goals. Although all investments involve risk, including the potential loss of principal, some securities, such as equities (stock), among others, involve more risk. Higher risk investments may have the potential for higher returns, but also have the potential for greater losses.Generally speaking, investment objectives are on a spectrum, with “Income” investors generally holding the smallest percentage of higher risk investments and “Trading and Speculation” investors holding the largest percentage of higher risk investments. Similarly, risk tolerances are on a spectrum such that an investor with a “Conservative” risk tolerance will accept less risk than an investor with a “Moderate” risk tolerance; a “Moderate” investor less than a “Aggressive” investor; and a “Aggressive” investor less than a “Trading & Speculation” investor. The “Aggressive” investor accepts short term market volatility associated with a large proportion of higher risk investments because he or she has a long term time horizon and seeks the higher long term return potential associated with these higher risk investments.
Income portfolios emphasize current income with minimal consideration for capital appreciation and usually have less exposure to more volatile growth assets.
Growth and Income portfolios emphasize a blend of current income and capital appreciation and usually have some exposure to more volatile growth assets.
Growth portfolios emphasize capital appreciation with minimal consideration for current income and usually have significant exposure to more volatile growth assets.
Trading and speculation investors seek out a maximum return through a broad range of investment strategies which generally involve a high level of risk, including the potential for unlimited loss of investment capital. (not applicable for retirement or advisory accounts.)