While your own life circumstances are unique, most people tend to fall somewhere on the investment risk spectrum ranging from very conservative to very aggressive. A conservative portfolio would emphasize lower risk investments that minimize portfolio volatility and yield lower returns. On the other end of the continuum, aggressive portfolios favor equities, which tend to fluctuate significantly and are susceptible to periods of both higher return and higher loss. Our five model portfolios correspond to the risk levels on this spectrum, and serve as the initial basis for creating your own customized portfolio.
Your portfolio holds a healthy mix of highly diversified categories of investments, often known as asset classes. This allocation mitigates risk by dividing assets across a variety of securities types that behave differently from one another in various economic circumstances. The NI investment committee determines the percentages to be allocated to these categories each quarter so that, depending on macroeconomic reality and your risk profile, your portfolio will have exposure to a dozen or more different asset classes, and the allocation within them may change as the economy does.
While our Questionnaire enables you to clarify where you stand on the risk continuum, here is a way to begin to identify your tolerance level:
Conservative investors have the goal of preserving capital, so if you think you’d be highly concerned about your investments losing value, even if for a brief period of time, this approach offers the lowest risk of volatility and depreciation. This is often an approach used if you need current income from their portfolio for living expenses rather than growth of the assets.
Moderately conservative investors, while still focused on generating income from debt instruments, can handle a bit more volatility and therefore have more exposure to stocks. This approach is suitable if you want to have a steady return of interest to augment your other income, but you could handle some short-term losses in exchange for the possibility of longer-term growth.
Balanced investors have similar exposure to lower and higher-risk investments and so offer the best of both worlds – balancing income and growth – in equal parts.
Moderately aggressive investors want to modestly grow the value of the portfolio. If you’re relatively comfortable with the swings of the market and have the personality to ride out its up-and-down cycles in the hopes of achieving higher long-term return, you understand that this approach can experience periods of significant downturn but find this risk acceptable given your investment time horizon.
Aggressive investors are geared primarily to grow their assets significantly over many years, and as such the portfolios are primarily equities, a higher percentage of which are in the riskiest types of investments. With this approach, you’re willing to sustain unrealized losses in the intermediate term because you ultimately seek long-term gains.
Your advisor will work with you to determine where you fit on the spectrum of risk tolerance. You may feel like you’re between categories, which is fine. And, while we don’t recommend changing the strategy often, we also know that life circumstances sometimes warrant a wholesale shift in the approach, so communication is key to planning any significant changes for the portfolio.