Are you really an “aggressive” mutual fund investor?

Every new mutual fund investor, especially new ones, is an aggressive investor these days. They can take very high risks, they say. They look for programs that will provide them with the highest returns. However, a look at their existing investments in mutual funds is mostly unrelated to their reported risk profile. Some investors have investments in relatively safe options like large cap plans. Some others have random investments that they believe will bring them higher returns. Why the disconnect between their risk profile and investments?

Mutual fund advisors and financial planners say these investors are confused about the concept of risk. Advisors also say that investors tend to minimize risk whenever the market is up. They also believe that Do It Yourself investors take too many risks without worrying about the consequences. “It’s not new. This always happens when the markets are gaining a lot. Now it’s amplified by mutual fund forums,” says one mutual fund investor who doesn’t want to participate in the discussion. He says investors, especially new ones, don’t appreciate any effort to educate them.

Advisors say investors can understand the difference between “risk-taking” and “risk-taking” and better understand the concept of risk. They say most investors confuse these two. For example, suppose an investor has a lot of wealth. This gives the investor the opportunity to take risks. But is he ready to take risks? He may not be. Or it can be. In fact, you’d be surprised to know that the ability to take risks has nothing to do with the willingness to take risks.

Financial planners say they spend a lot of time making some investors understand the distinction between these two concepts. “We use rules of thumb when it comes to general investment plans. We assume that young people can afford to absorb the losses because they have time ahead of them. But that doesn’t have to be true,” says a financial planner. He says that these general assumptions can only make us better understand the concept. So don’t take these rules as gospel.

Another easy way to understand the risk of a risky investment is to ask if you’re okay if you lose 50% of your investment and wait a few years to make it up. Advisors say seasoned investors understand the risks involved because they can recall similar situations in the market. New investors either don’t have these memories or have forgotten these examples.

Risk is an integral part of the investment process. However, that doesn’t mean you’re taking unnecessary risks to maximize returns. Take calculated risks. Don’t jump on the bandwagon of aggressive investors who can take on a number of risks to pocket higher returns.

Dolores W. Simon