Are You an Aggressive Investor?

To Whichever Way the Water Flows

You have a private equity fund. And you say to yourself, I have arrived.

But, have you?

Because, in fact, it may take you longer to arrive.

First things first. Let me explain what a private equity fund is (but please bear with me – we will be going a little technical here). It is typically a limited partnership, in which the private equity firm acts as the general partner and accredited investors fund the investments of the partnership. According to Daniel R. Solin in his book, The Smartest Portfolio You’ll Ever Own, the average returns on equity funds, net of fees, were 3% below that of the S&P 500 (an index that consists of 500 stocks weighted by market value, often incorrectly used as a benchmark for the performance of the US stock market) and fees were a whopping 6% a year.

The fraud (it is fraud) does not start, or end, with private equity funds.

To the uninitiated, the definitions and fancy finance-investment terms may sound gibberish. But think Bernie Madoff, think swindling, think money – a lot of money, and think of the public being had. Except it is completely sanctioned because the investor himself sanctioned it. Seldom does he know that by entrusting his hard-earned income to a fund manager, he is giving his fund manager freedom to just rake in a whole lot of fees. And when the investments the fund manager makes are not sound – you just have to ask – who is looking out for you?

You should look out for you.

And you should start by knowing what kind of investor you are. Are you conservative?  Are you aggressive? To know this (and knowing is half the battle), you can turn to Grable and Lytton and the Investment Risk Tolerance Quiz which is in this site.

Then we return to Solin’s book, where he provides a guidepost for the kind of investor you are.

Ready?

Wait.  Before we go on, let me explain that time is of the essence in investment, that is, how much time can you give to an investment? How long before you will need at least 20% of the money you invest? (this is why I always advocate investing money you will not need, or an amount you will not regret, or cry over)  And then there’s this other factor – how much loss can you bear before you cringe and dump an asset?  Please keep these in mind (20% and loss tolerance) as Solin uses these concepts when he prescribes the porfolio that is right for your risk appetite.

Ready?  Okay.

For those who are really conservative, with scores that are negative or level zero (think Kung Fu Panda), you should have a portfolio that is stock market-free or 100% composed of purely FDIC-insured savings accounts, Treasury bills, and high quality money market funds from major fund families like Vanguard or Fidelity (but know that these carry slightly more risk).

For those who are moderately conservative (score of 0-18), you should probably go Low Risk (20% stocks, 80% bonds).  For this, you should not need your money for at least 4 years, and should not quiver at a 5% loss in any year.

Are you Medium – Low Risk (score of 19-22)?  You should go 40% stocks and 60% bonds.  6 years is the minimum period you should invest, and you should not quake at a 15% loss in any year.

For those who are Medium Risk (score of 23-28), you should invest in 60% stock, 40% bonds.  8 years is the holding period for you, and you should be undaunted with a 25% loss in any year.

Medium – High Risk will have a score of 29-32 and should invest in 80% stocks and 20% bonds for at least 12 years and should not fear a 35% in any year drop in the market.

High Risk, or those scoring 33-47, should do 100% stocks and 0% bonds.  They should be players who can afford not to need their money for 15 years and are not scared of a 45% loss in any one year.

Try the Grable-Litton test and find out what kind of an investor you are.  A caveat, though.  They have pronounced me as aggressive, and I have acted as such.  But when the market dipped in 2009 and I needed the money, I chickened out and gained only 20% (for 2 years, which is not bad – what bank will give me 10% per annum?).  But then, the market recovered and if I held off selling, I would have gained far more – maybe in the area of 80%.  But then, that’s life, and there are many factors.  There is age (the older you are, the less aggressive you should be in investing), there is fear, there are the market forces and the political upheavals.

But one thing is true (and Solin’s book and the statistics show it is true), you will win in investing, and in stocks, if you buy low and can hold off selling.

Happy investing!

Article and Photo by Melissa Remulla-Briones. Copyright 2009-2011.
Website: www.YouWantToBeRich.com
Email: issa@youwanttoberich.com

P.S.  I am Blogher’s featured blogger in Career (please see this link).  Yay!  Thank you BlogHer for the support!

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