Investment Personality: Profile of a Moderate Investor

By Justin Pritchard, CFP®, a financial advisor serving clients nationwide.

Moderate investors are typically “middle of the road” risk-takers. They are aware that markets go up and down, and they’re okay with that—up to a point. A moderate investing strategy (as shown below) pursues long-term growth without going all-in on risk.

On this page:

  • Who is a moderate investor?
  • Sample portfolios with moderate risk
  • Is diversification a “free lunch” for investors?

There is no official or agreed-upon definition of a moderate investor (or any kind of investor). Investing is personal, and your ability to take risks depends on several factors. Even professional investment managers and large firms have different views on how much risk a moderate investor should take.

Am I a Moderate Investor?

Sign showing risk of wildfire in outdoors areaIn general, you’re a moderate investor if you want to grow your money without losing too much. The goal is to balance out opportunities and risks, and the approach is sometimes described as a “balanced” strategy. To pursue growth, you need to tolerate some losses, which tend to be temporary—but they can still be scary and unpleasant.

You can reduce that volatility and attempt to avoid catastrophic losses by using an investment mix that includes relatively stable investments.

If a moderate investor describes herself, here’s what you might hear:

“I believe I will be rewarded for taking some risk over the long term. But I don’t want to get too crazy. I’d like to take a middle of the road approach: not too aggressive, not too conservative. I know that my account value will occasionally go down, but I believe that the risk will pay off over long periods (10 years or more, for example).”

Clients often say, “I want high returns with a low level of risk” (usually they’re half-joking). Unfortunately, that’s impossible. Diversification can certainly improve your chances, but you ultimately need to decide if you want to prioritize one over the other (or if you’re happy with a moderate level of risk).

To learn more about your risk preference, try this risk profile quiz developed with input from psychologists.

Moderate Investment Mix Samples

Moderate investors, also known as balanced investors, typically use a mixture of stocks and bonds. They might be roughly 50/50 or 60/40. That is: 60% of their assets might be in stocks (large companies, small companies, overseas stocks, etc.) with the remaining 40% in bonds (including government and agency bonds, corporate bonds, high-yield bonds, foreign issues, etc.).

Important: These allocations may not be suitable for everyone and are presented as examples and for educational purposes only. All investing comes with a risk of loss, and even with a diversified mix of investments, there is still market risk—and the potential to lose your investment. Please consult with a professional investment advisor before taking action. You can work with an advisor for one-time investment advice or ongoing investment management services.

A moderate portfolio model might look something like this:

  • 22% Large-Cap
  • 8% Mid-Cap
  • 6% Small-Cap
  • 20% Overseas Developed Nations
  • 4% Emerging Markets
  • 40% Diversified Fixed-Income

This approach provides a decent amount of exposure to the stock market without the risks of a 100% stock portfolio. The bond portion helps to smooth out the ups and downs of the stock market, and can provide some income and “total return” (all of which might be reinvested for future growth).

Alternatively, a four-fund approach can also provide a simplified approach to moderate exposure:

  • 40% Total Bond Market Index Fund
  • 30% Total Stock Market Index Fund
  • 24% Total International Stock Index Fund
  • 6% REIT Index Fund

In addition to the asset allocation, considering sustainable investing issues might affect your performance—and your satisfaction as an investor.

“Do it For Me” Approaches

You can also have somebody else diversify your money for you. Target-date funds and target-risk funds invest in numerous investments (while you only select one investment). They may even be called “moderate” funds—but it’s critical to examine the underlying investment mix to make sure it meets your needs. Some moderate funds are riskier than others.

Financial advisors like me can also build and maintain a moderate investment portfolio. With an advisor, expect more customization—and possibly more management (but hopefully not too much) over time.

Risks of Being a Moderate Investor

A moderate portfolio is designed to balance out risks while still accepting some risk. With roughly half of the portfolio in the stock market, investors can still lose substantial amounts of money when the market goes down.

How a moderate investment mix performed historically - past performance does not indicate future results
Rolling returns are “slices” of history (every possible 10-year slice in the period, for example).

According to Vanguard, a portfolio with 60% in stocks and 40% in bonds provided 8.6% average annual returns from 1926 to 2018 (important: Past performance does not guarantee future results, and this is not an endorsement of any investment company—this is just a glance at history). That portfolio lost money in 22 out of 93 years, and losses in excess of 20% are not unheard of with a 60/40 portfolio.

Moderate investors can have either too much or too little in stocks. For an investor who is willing and able to take more risk, perhaps they should have more than half of their portfolio in the stock markets (with the hope of getting more growth and outpacing inflation). A different investor, who is less able to tolerate risk, might be pushing it by having half of their money in stocks. Just because something is 50/50 doesn’t mean it’s a good mix. Why not 70/30 or 30/70?

Bonds Can Lose Money, Too

Finally, balanced investors need to remember that bonds are not risk-free investments. In 2008, for example, balanced funds suffered badly, as both the stock and bond portion of these portfolios lost value. Bonds also lost money during the COVID-19 volatility in 2020. Even “safe” bonds can lose money, especially (but not exclusively) when interest rates rise.

What Does Diversification Do?

When you spread your money among a variety of different investments, you can potentially reduce risk.

That doesn’t mean you can avoid all losses—you can’t, unless you put cash in government-guaranteed bank and credit union accounts. But this might be the closest you can get to a free lunch when you invest in the markets.

This (very busy) chart shows how different types of investments performed year-by-year and over the long-term. They are stacked from the highest return to the lowest for each period. You can see that wild swings are common, and there’s no way to predict what will do best. The light-grey boxes show a moderate allocation using a mixture of investments. It’s never the best, but it’s never the worst.

Chart of historic returns with long-term volatility, and moderate allocation highlighted

Perhaps most importantly, this approach had relatively low volatility (as measured by standard deviation). Put another way, you smooth the ride when you invest in numerous different areas. Of course, there is no free lunch in investing because the returns were also lower for asset allocation approaches than they were with (some) 100% stock approaches.

How Do Most People Invest?

A study from Vanguard shows that most investors take a moderate level risk—or more risk, depending on how you look at things. The median household exposure to stocks from the 2020 How America Invests study was 75%. But when looking at the weighted spread of dollars in Vanguard accounts, roughly 63% was in stocks. Not surprisingly, as investors get older, that number declines, with Baby Boomer and Silent Generation investors hovering closer to that 60ish% average.

What About Individual Stocks?

Opinions vary, but I believe individual stocks don’t have a place in most moderate investment portfolios. Sure, you can diversify by buying dozens of stocks from numerous sectors, countries, and size profiles. But any company can go bankrupt or find itself in a scandal, and it’s hard to justify that risk. Plus, the time it takes to research and monitor each company is staggering (if you do it conscientiously).

That’s just my opinion—it could be wrong, and maybe you’ll have good fortune with individual stocks.

To stay diversified, consider using mutual funds or exchange-traded funds that invest in numerous underlying holdings. With low-cost investments, you can build a diversified portfolio relatively easy, and you can spend your time on more important things in life.

Get Help With Your Portfolio

There are several ways to enlist the help of a professional:

  1. Get a quick review of what you’re currently doing (a one-time deal).
  2. Get ongoing investment management (if you want to be hands-off).

I have over 15 years of experience helping clients manage their money, and my CFP® certification and MBA help with building practical investment approaches. Whether you just want to hire me for a one-time QuickStart meeting or you’re considering a longer-term relationship, we can probably work together.

You’ll end up with the answers and clarity that can help you focus on more important things in life.