I’m not talking about whether you’ve gone skydiving or bungee jumping. I’m talking about your attitudes towards financial risk.
If you want to create a solid financial strategy, you need to invest your money.
But investing is a risk.
It is impossible to know with absolute certainty that your investments will succeed.
The investments you undertake must fit with the level of risk you are comfortable with.
Understanding your risk profile is crucial.
Your risk profile helps you determine how you should invest your money for maximum gain.
It encapsulates your attitude towards debt, your tolerance of market volatility, your concerns about loss of capital and your investment comfort level.
Not all investments work for all people.
If you are risk averse yet dive headfirst into a volatile market, chances are your investment will fail.
If you can make investment choices based on your core money values and attitudes, you will have more chance of achieving investment success – and financial liberation.
What determines your risk profile?
Your risk profile is shaped by numerous factors, including:
- Your investment experience.
- Your ability to understand financial matters.
- Your investment time horizon, eg. 10 years, 20 years or 30+ years.
- The importance you place on understanding what you are investing in.
- Your tolerance level towards investment loss.
- The level of cash you have available to top up investment losses or unexpected expenses.
- Your income and tax rate.
- Your level of personal debt, eg. mortgage and credit card debt.
- Your desired retirement income.
Where are you on the risk profile spectrum?
There are five areas in the risk profile spectrum:
Conservative: A conservative investor is afraid of losses.
They have the most basic understanding of investment markets.
They focus on protecting their capital, seek moderate returns and are prepared to only take a very low level of financial risk.
Balanced: A balanced investor is also a low-level risk taker, yet is prepared to establish a more diversified investment portfolio.
They have a reasonable understanding of investment markets. While they are wary of potential losses, their focus is more on possible gains.
Progressive: This type of investor is focused on opportunity and quality investments.
They are more accepting of market fluctuations and can accept higher levels of investment risks.
They have a long-term investment time horizon and seek to achieve a moderate rate of growth on the capital they invest.
Assertive: An assertive investor is focused on capital growth and accumulating wealth quickly.
They have a solid understanding of all major investment markets and get a thrill out of taking financial risk.
They have a long-term investment time horizon and understand that the higher the level of risk, the higher the potential gains.
Aggressive: An aggressive investor has a superior understanding of investment markets.
They know that high volatility and high risk are central to high-value investments.
They predominantly invest in shares, staying focused on possible gains.
They think for the long term and expect high-level returns.
So, where do you sit in the risk profile spectrum?