Getting to know yourself is an important thing because the results of your investments depend on how your emotions react to stock price volatility. The better you are able to control your emotions and make more logical decisions, the higher your probability of making profitable investments. In order to achieve that, you have to understand your risk appetite and determine your investment style.
Understanding your risk appetite
As a general rule of thumb, you can determine your risk appetite based on three age stages:
- 18-30 years old (young)
- 31-50 years old (adult)
- Over 50 years (mature)
The young investor usually has a stock portfolio comprising 70% in value-growth stocks (for capital gains) and 30% in dividend stocks (for passive income). Value-growth stocks are considered risker because they are usually small to mid-cap companies. Dividend stocks are mature companies with limited growth but pay a stable dividend.
As your age increases, your risk tolerance decreases. The adult investor may have a stock portfolio that comprises 50% in value-growth stocks and 50% in dividend stocks. Once you hit the mature stage, your portfolio could have 30% in value-growth stocks and the rest in dividend stocks. At that stage in life, passive income becomes more important because you need it to supplement your lifestyle then.
Determine your investment style
When it comes to investing, there are many styles. You have to determine which style you want to focus on and which you’re most comfortable with. At The Fifth Person, we advocate three styles: value-growth investing, dividend investing, and deep value investing. Value-growth and deep value investing focus on capital gain while dividend investing focuses on… dividends!
Remember, age is just a general rule of thumb; you can definitely be a 100% dividend investor even in your twenties if that’s what you prefer. But choose a style that suits your personality and risk tolerance, so you can sleep peacefully at night when you invest.