When we give strategic investment advice on securities, we often qualify it by saying that some securities are suitable for conservative investors while others are better suited to aggressive investors, or those who can accept a higher level of risk. For example, we generally consider well diversified equity funds that invest in large, high-quality companies to be conservative. Smaller-cap funds that invest in low-quality companies can be considered aggressive.
Investors often disagree on the differences between an aggressive approach in their investment strategy and a more conservative, defensive one. Every investor probably has his or her own ideas about both differing approaches to strategic investing.
Few would disagree if we put it this way, however: Aggressive investors stress gains, even to a point where they risk losing capital. Defensive, conservative investors put their stress on preserving capital, even if this means they must forego some gains.
When you come down from that theoretical plane, you’re faced with the necessity of sizing up an actual investment as aggressive or defensive. Few investments fall neatly into one camp or the other. Most, though, show a tendency, one way or the other, if you know where to look.
Quality, risk and volatility
We base our recommendations on a variety of measures of quality and risk. But generally, we consider the shares of established, high-quality Canadian companies as conservative. This may limit their gains in fast-rising markets, but it should also limit their losses in inevitable market setbacks.
At the opposite end of the spectrum, aggressive investors seek higher returns. And they’re prepared to invest in substantially riskier, low-quality companies to do so.
The more volatile an investment, the more aggressive it is. Unpleasant surprises with these types of investments, should they appear, will probably cost you more than in defensive investments.
More than a formula
A friend has tried to reduce his strategic investment plan to a simple formula. He has decided in advance, for instance, that if interest rates rise above a certain level, he will switch his portfolio from equities to fixed-income securities (such as Government of Canada bonds and GICs); when rates fall, he’ll switch back.
Such a formula is fine — if it works. But timing your switches back and forth between equities and fixed-income securities can be a problem.
We’ve found over the years that the best long term strategic investment plans don’t rely too heavily on tools or formulas, such as industry over weightings, or switching back and forth between equities and fixed-income securities. Instead, they all seem to see investing as a process whereby you educate yourself about the investments you own, rather than relying heavily on formulas or simplifications.
We believe investment portfolios are best built through a sound, systematic long term strategic investment plan. We feel you should pick stocks and mutual funds, such as those we recommend in Money Reporter, that best suit your own needs.
Then, balance your choices so that you do not have too much exposure to any one industry sector or geographical location. Only then are you likely to achieve investment success in the long run.
Money Reporter, MPL Communications Inc.
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