So you are on your way to build wealth, but what is the point of getting all that wealth if you are stressed out in the meantime due to the ‘risk’ you are taking accumulating it all?
Before you set an investment strategy and start following it, it is best to figure out your Risk Profile. Risk profile is the acceptable level of risk you are prepared to accept.
To get your profile, thus working out your wealth accumulation strategy you need to first understand the following:
- risk required is the risk associated with the return required to achieve you goals from the financial resources available,
- risk capacity is the level of financial risk you can afford to take, and
- risk tolerance is the level of risk you are comfortable with.
Whilst Risk Required and Risk Capacity can be easily determined by your financial advisor, Risk tolerance is highly personal.
To determine your Risk Tolerance you need to consider the possibility that the value of your investment may decline even though this may be temporary. Are you prepared to accept the possibility of a negative return at any time in exchange for potentially higher long term returns? What percentage of your money would you be prepared to invest in higher-risk investments? Which of the following is important to you:
- Avoiding any short-term losses
- Receiving regular income from investments
- Long-term growth in the value of investments
- Protection against inflation
What are your goals? Why are you investing? Is it for something in the near future (new car, or down payment on a home) or something farther off (a young child’s education or your own retirement)? If your investing goals are short term you want your money to be there – with interest – when you need it. Therefore you will need to focus on relatively short term investments like term deposits or a cash management trust. If on the other hand, you are investing for the long term, you may be able to afford to take some risk in pursuit of a higher return. Shares, property, and growth orientated managed funds which historically have provided higher returns than fixed interest or cash over time, may be more appropriate.
When do you expect to need to access all or part of your investments:
- Less than 1 year (immediate access)
- Less than 2 years (short term)
- 2 to 5 years (short to mid-term)
- 6 to 10 Years (mid to long term)
- Over 10 Years (long term)
Once you have considered all of the above and looked at your answers, you can determine which Risk Profile suits you the best? You may even find that you will have a couple of different strategies, depending on your goals.
Your ‘sleep at night’ factor is very personal, but to help you get a better understanding of the Investment styles see details below.
|Investment style||Your primary investment goal is….|
|Conservative||Capital protection You require stable growth and/or a high level of income, and access to your investment within 3 years.|
|Cautious||Capital protection You require fairly stable growth and/or a moderate level of income. Your investment term is 3 years or more.|
|Moderate||Capital growth You can tolerate some fluctuations in the value of your investment in the anticipation of a higher return. You don’t require an income and you are prepared to invest for 5 years or more.|
|Moderately aggressive||Capital growth You can tolerate a fair level of fluctuation in the value of your investment in anticipation of possible higher returns. You don’t require an income and you are prepared to invest for 5 to 10 years.|
|Aggressive||Long-term capital growth You can tolerate substantial fluctuations in the value of your investment in the short-term in anticipation of the highest possible return over a period of 10 years or more.|