Your Investor Profile

Different types of investors need different kinds of portfolios

Understanding yourself as an investor is one of the key considerations in creating an effective portfolio. You first must determine whether you are a conservative or an aggressive investor and more importantly - ensure that your self-assessment is accurate. Profiles range from extremely conservative to very aggressive. An adviser has the expertise to recognize where you fit within that range and develop a portfolio to match your unique profile.

Seeking security

As the name suggests, conservative investors are focused on protecting capital. Principal protection is important for many reasons. For example, if you are saving to buy a car or put a down payment on a house in a few years, you need to be certain that the funds will be available at that time.

Temperament is also a factor. Some people are simply not comfortable holding investments that may fluctuate in value. Conservative investments are by definition low-risk. They include cash deposits, select Guaranteed Investment Certificates (GICs), principal protected notes, and money market funds. On a long-term basis, the returns of investments like these are not likely to match the returns available in growth-oriented assets, but the security they provide is an important component of a diversified portfolio.

Balancing act

A balanced portfolio is likely to include a mixture of short-term GICs and money market funds (for security), bonds, bond funds, or long-term GICs (for income), and equities or equity funds (for growth).

The precise proportion of those assets will depend on the individual investor, but is likely to be somewhere around 50% growth and 50% security and income.

A balanced approach may be appropriate if you are investing for a medium-term goal — for example, paying for your child’s post-secondary education 10 years from now.

You are willing to take on some risk in order to achieve higher returns than guaranteed assets can offer, but at the same time you want a healthy weighting of consistent returns to protect your capital.

Going for growth

Aggressive profiles are for investors who want to see capital increases over the long term. Generally, this means investing in equities or equity mutual funds. Over the long term, these assets have historically provided returns that are higher than those available in cash or cash equivalents or fixed-income investments.

In the short term, however, growth investments, including those that make up the growth component of a balanced portfolio, are subject to volatility. In other words, their value fluctuates. At times, they might even be worth less than what you paid for them. The most successful growth investors are those who are comfortable with volatility. They are willing to ride out temporary fluctuations because they believe that, over the longer term, their portfolio will increase in value.

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