How to Invest in 2012 Based on Your Risk Appetite

What kind of risk taker are you? Do you go all out to make that killing even if it means jeopardizing all that you got? Or, do you prefer to take small steps, one at a time and slowly climb the ladder of financial security?

Most of us think that we take investment decision based on the money we got, the market cues, interest rates etc. but in fact that is not the whole story. Investments decisions are mostly subjective; dependant on the amount of risk we take.

The Three Types of Risk Takers

Broadly there are three types investors based on how each of them view risk. They are Mr. Thakurji the conservative risk taker, Mr. Gabbar Singh the aggressive risk taker and Mr. Jai the balanced risk taker.

Mr. Thakurji is a soft spoken gentleman who wishes to make a quite living without making much noise. He prefers low risk investments and do not wish to take any risk. He invests only in assets that give a steady flow of income even if the returns are very small. He lays low and loves to live a peaceful life. His investment portfolio will surprise you with the absence of even a single high risk instrument.

His motto is not to lose even one penny of your principal.

Mr. Gabbar Singh, on the other hand, is the exact anti-thesis of our above said gentleman. He loves to live life on the edge. Taking high risks is second nature to him. He prefers to attack with all that he got. His investment kitty is full of high risk instruments that could either turn him in to a millionaire or a beggar overnight.

His motto is to spend every penny you got in order to make more pennies to spend.

Mr. Jai, our hero is a go-between when compared to Thakurji and Gabbar Singh. Jai loves to stay at home when needed and lives within his means. However he also loves the good things in life and is ready to take small amounts of risks if it promises a good return. He may go for high risk stakes but he never gambles. Finally he knows exactly when to quit. His investment kitty will also surprise you with the right blend of low-risk and high-risk instruments.

His motto is simple: spend your each penny wisely.

Now let us see what 2012 has in store for our three gentlemen when it comes to investments.

How Our 3 Gentlemen Must Invest in 2012

The coming year is very crucial from an investment point of view. This is because the effects of 2011 will be played out this year. The weakness in Euro zone is still haunting us and risks another recession spreading out this year. Back home inflation rate is pretty high, value of rupee is dropping, and the deficit is still huge, not to mention high corruption and weak political stability.

In such troubled waters how can our three gentlemen make some dough?

For Mr. Thakurji, our perennial risk averter, making investments in debt instruments and more in fixed deposits can bring stability and income. With inflation hovering high, interest rates in India are bound to stay up making bank investments a good option.

Traditional tax free investment options such as NSC, ELSS, home loans etc. that came under 80C is going to lose luster as they will be taken out of 80C from April. Therefore it is wiser to move your investments in to other tax saving investment options.

Infrastructural bonds are a good bet given its triple A ratings and the returns they are giving. However, it would be wise to re-think investments in Gold because it is at an all time high. If the present crisis shows signs of abating this could burst the bubble in gold prices.

Mr. Gabbar Singh will have many opportunities to gamble this year too. Markets will be volatile considering the weak global financial situation. We can expect huge fluctuations to either side of the chart; therefore, what Mr. Gabbar Singh must realize is that the market can go either way. It would be wise if Mr. Gabbar Singh be ready to make money both in the bull market and bear market too.

With phenomenal rise in gold prices it is hard to predict where it will go from here. If there is recession around the corner then it is going to shoot up again. The risk is pretty high, which is what Gabbar Singh is exactly looking for. However don’t forget that there are other commodities too. A weak global market might bring down the base metals.

As for Mr. Jai, it is better you invest more towards the low-risk options. This year is slippery and only cautious investments are going to take you to the other side. So walk slowly and steadily. To satisfy your limited risk taking appetite buy stocks that have gone below its intrinsic value. Make sure to buy it for on a long time basis. However it is wise to keep stocks to 10% of your portfolio.

Don’t invest in Gold thinking it helps to tide over inflation. Gold is fast changing its role as a store of value during inflation to more of an investment asset. Inflation Indexed bonds are the best solution to tide over inflation. However, invest in it if the government gives the green signal for it to be introduced into the market this year.

Well, hope our three gentlemen got the idea about how to invest in 2012 and good luck to them all. However for you let us say it is better to follow Mr. Jai because at the end of the day your assets must be secure and provide you with a steady flow of good returns. So invest wisely, stay secure and make lots of money.