This is a two part questions. First I will need the discussion question answer which will be below in bold, 250+ words APA format. After that is done I will extend the time and for those response I will need three responses of at least 150 words each.
Investors are concerned with holding an optimal portfolio. Consider the choices an investor can make. How will the portfolio choices differ for a conservative investor? What about an aggressive investor? Which type of investor would you most likely identify with?
This question reminds me of the investment app that I use called Acorns. It is probably one of the easiest ways for one to get involved in investing as it is largely hands-off after you do the first account setup. In that account setup process, you choose how aggressive or conservative you would want the application to be when investing your money that you put into the pot. The more conservative an investor is, the less risk they are taking with their money, but this also means that they could potentially miss out on profits if they were to take a more aggressive approach. Likewise, the more aggressive an investor is, as previously suggested, the more chance for higher profit, but also there is a higher chance to lose your money.
For an extreme example, look at penny stocks. A smart investor can make a lot of money daily trading with penny stocks, double their money easy. But those stocks are highly unpredictable, and all of that money could just as easily disappear. Gallant (2020) explained the primary differences between conservative and aggressive portfolios based on the diversity of three different categories; Fixed Income Securities, Equities, and Cash/Equivalents. The more conservative the portfolio is the higher the income securities would be and the more aggressive the portfolio is, the higher the equities would be.
When it comes to which side I would probably identify more with, I would say that would be an aggressive or moderately aggressive portfolio, this is despite the fact the tools that I have used to help me determine if I should be aggressive or conservative, they always say conservative. This is based on my financial standing and how much money I have available to risk I would imagine.
Gallant, C. (2020, March 19). Learn 4 Steps to Building a Profitable Portfolio. Retrieved from https://www.investopedia.com/financial-advisor/ste…
The term Optimal Portfolio, in this instance, refers to the makeup or construction of the type of investments held by and investor or group. Diversity is an important thing when it comes to the security of a investment portfolio. This can mean several things. The first thing that comes to mind when I hear or think of diversification in investments is not putting all of your eggs in one basket so to speak. This mean spreading out the total of your investment into varying industries perhaps. Could also mean holding different or varying investment holding such as a mix of stocks, bond, or other risk-bearing assets (Vista Capital Partners, n.d.).
Another common use of the term optimal or mix refers to the risk of the investments held within a portfolio. While not always the case, often times, the higher the return on investment the riskier the investment. There is also some correlation with fast turnaround or short holdings versus long-term holdings. On the other hand, very stable investments that offer little risk, unfortunately carry only small return on investment. Apart from the obvious reasons, many investors will have different reasons for selecting a portfolio mix. Thatâ€™s also to say that everyoneâ€™s ideal mix may not be the same. For example, many investment managers recommend that younger investors maintain a more aggressive and hence volatile portfolio than older investors (Marquand, 2020). This is due largely in part to when the funds will need to be available and how much risk tolerance can be justified or handled. Which I think this leads to the interesting point that risk is not always unacceptable given the correct circumstances.
Marquand, B. (2020). Risk Tolerance: What It Is and Why It’s Important. Retrieved from https://www.nerdwallet.com/blog/investing/what-is-…
Vista Capital Partners.Retrieved from https://vistacp.com/wp-content/uploads/2015/07/The…
For the conservative investor, I think itâ€™s important to separate them by age. I define a conservative investor as one with a low risk tolerance, which doesnâ€™t always mean older folks. I know plenty of people my age who are terrified of losing money (even if itâ€™s just paper losses in the stock market). For a young conservative investor: I would go all in to domestic large capitalization equities. These are the blue chip stocks we always hear about. Itâ€™s easy to stay abreast of the news for these stocks and itâ€™s hard to imagine a future without the Disneyâ€™s and the Appleâ€™s of the world. The long time horizon essentially cancels out the risk of holding equities. As you get older as a conservative investor itâ€™s time to move into fixed income investments such as preferred stock and bonds. This is especially the case with things such as college funds, which canâ€™t be easily pushed back like a retirement. Finally in their old age, a conservative investor should only have fixed income, so they arenâ€™t forced to sell of stocks in a market downturn. The exception here would be if you were passing assets to your family through inheritance.
For the aggressive investor, I would still be 100% equities for younger people. The makeup would change, I would dedicate at least half of the portfolio to international and small to mid capitalization stocks. These companies tend to grow better, but are more risky than blue chips. I think that itâ€™s important to have international stocks because the US economy is not what it was. It seems like GDP grows about 2% a year for the US, compared to 7% for China. There is real growth opportunity outside the US. For middle aged aggressive investors I would stay in equities, but perhaps shift some to ETFs and income stocks. I wouldnâ€™t rotate an aggressive investorâ€™s portfolio towards bonds until they were at retirementâ€™s door.
I myself am an aggressive investor. Since Iâ€™m only 26, I have a 39 year time horizon until I even begin to think about retirement. I currently invest in Small â€“ Mid Cap US ETFs, Emerging Market ETFs, and some individual company stocks that I really believe in. I wonâ€™t start changing that allocation until I get real deadlines on my investments (for instance my hypothetical childâ€™s college fund). I view Bonds and Annuities as the enemy, but as I get older Iâ€™ll start rotating my portfolio into Bonds. The reason is that I never want to be forced to sell stocks in a market like the one now or the one we had in 2008.
Cochrane, M. (2018, July 25). A Modern Approach to Asset Allocation. Retrieved March 24, 2020, from https://www.fool.com/investing/2018/07/25/a-modern…