Types of Risk Tolerance
Investors are typically divided into three categories based on their risk tolerance. The categories
are determined by a variety of factors, only a few of which have been discussed above. The
three categories are as follows:
Aggressive risk investors understand the market and are willing to take large risks. Such
investors are accustomed to large upward and downward movements in their portfolios.
Aggressive investors are typically wealthy, experienced, and have diverse portfolios.
They prefer asset classes with volatile price movements, such as stocks. Because of the
amount of risk they take, they benefit from superior returns when the market is performing well
but suffer massive losses when the market performs poorly. They do not, however, panic sell
during market crises because they are used to daily fluctuations.
When compared to aggressive risk investors, moderate risk investors are less risk-tolerant.
They accept some risk and usually set a percentage of losses that they can tolerate. They
diversify their investments across risky and safe asset classes. When the market is doing well,
they earn less than aggressive investors, but they do not suffer large losses when the market
Conservative investors are the ones who take the least risk in the market. They avoid risky
investments and instead choose the options they believe are the safest. They value avoiding
losses over making profits. They only invest in a few asset classes, such as FDs and PPFs,
where their capital is safe.
Neglecting Risk Tolerance
Investing without considering risk tolerance can be disastrous. When the value of an investment
falls, an investor must know how to react. Many investors flee the market, selling at a loss. At
the same time, a market decline can be an excellent time to purchase. As a result, determining
risk tolerance aids in making informed decisions rather than hasty, erroneous ones.