It is human nature to want the highest return possible. However, return is just one of the factors you need to consider when selecting an investment portfolio. Equally important is how comfortable you are with fluctuation in market values, your requirements for regular income versus capital growth and your investment time frame.
Risk profiling is a process for finding the optimal level of investment risk for an individual considering the risk required, risk capacity and risk tolerance, where,
- Risk required is the risk associated with the return required to achieve an individual’s goals from the financial resources available,
- Risk capacity is the level of financial risk an individual can afford to take, and
- Risk tolerance is the level of risk an individual is comfortable with.
This risk profiler helps in determining your tolerance to risk and how that relates to particular investments risk profile is a summary of your current situation, which is likely to change over time. You should periodically review your profile to ensure it remains consistent with your circumstances. Please note that risk profile should only be used as a guide and not a substitute for a detailed financial plan.
The analysis it provides can help you understand what sort of risk you are willing to take, what sort of investments to stay away from and why you make the decisions you do when it comes to finances. While no psychometric test can completely describe you, this questionnaire gives you an insight into how comfortable you are with risk. Broadly there are five risk categories:
Conservative investors are investors who want stability and are more concerned with protecting their current investments than increasing the real value of their investments. A conservative investor is generally seeking to preserve capital and as a trade-off is usually prepared to accept lower investment returns.
Moderately conservative investors are investors who want to protect their capital and achieve some real increase in the value of their investments. This investor is usually seeking a diversified investment portfolio with exposure to a broad range of investment sectors.
Moderate investors are long-term investors who want reasonable but relatively stable growth. Some fluctuations are tolerable, but investors want less risk than that attributable to a fully equity based investment.
Moderately aggressive investors are long-term investors who want good real growth in their capital. A fair amount of risk is acceptable. They are generally willing to trade some risk for greater long-term returns and typically will have a longer investment objective.
Aggressive investors are long-term investors who want high capital growth. Substantial year-to-year fluctuations in value are acceptable in exchange for a potentially high long-term return. An aggressive investor is comfortable accepting high volatility in their capital value, with the risk of short to medium-term periods of negative returns. They are willing to trade higher risk for greater long-term returns and typically will have a long investment objective.
Please note that your risk profile cannot completely describe how you will or should feel about any particular financial matter. Your choice on the level of risk to take in your financial matters should also take into account:
- Your timeframes – how much time do you have until your bigger goals? Longer time frames allow you to take greater levels of risk because the fluctuations even out over time.
- Life Stage – various seasons in life have an impact on the level of risk that is appropriate. When there are others dependant on you, the level of risk taken will need to be lower.
- Partner’s risk profile – where a partner is involved the level of risk should reflect both partners’ risk tolerances rather than just one.
Your risk personality assessment should be viewed as information for you to include in your decisions on financial matters, not as a constraint on what you should do.