The risk category of an investor can be profiled generally into 3 buckets:
Aggressive: This category demands greater exposure to high risk+returns asset classes (like stocks). The investors in this zone can use the classic 80:20 approach of diversification, where 80% of your assets are invested in high risk assets and 20% spread across low risk assets (debt instruments, gold, real estate etc.). The investors in this zone aims to maximise their returns (20%+ at least) and are willing to bear some loses (and take risks).
Balanced: This is a more balanced approach where investors want to generate modest returns (higher than debt instruments) but want to optimise their risk exposure as well. The investors here have a target returns of at least 10%+. Investors in this zone use a 50:50 asset mix of low risk vs high risk assets.
Conservative: This is a defensive option, where investors aim at capital preservation (majority of the investments in debt instruments). The investors in this bucket generally aim at target returns of 7.5-10%, with greater than 80% of there portfolio invested in debt instruments.
Thus based on your investment style you should choose the basket of assets you are investing in. This alignment is very fundamental to your financial well-being and is something every investor should be aware of.
Why knowing your investment style matters?
As mentioned above the investment style of an investor should be in synergy with the asset mix in his/her portfolio. Such synergy ensures peace of mind for an investor and prevents hasty decisions (which often result in losses).
To understand this better, here is an example: an investor with "conservative" investment style if holds majority of stocks in his/her portfolio, then during the times of volatility investor will not be at all comfortable with wild swings in market and his/her portfolio value. As a result investor will start taking judgements out of fear or greed (emotions) versus logic, and that is the most risky part of any financial decision (and mostly guarantees losses in stock market). We should learn to separate out our personal biases and or emotions from investments in order to maximise our returns in market.
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