Risk Profiling identifies an acceptable level of risk you are prepared/willing to accept. It is important in determining the most suitable investment asset allocation for your portfolio (super or personal investments) to enable you to meet your investment objectives.
Investors typically want low-risk, low fees, no taxes, and high returns. This isn’t possible, so all investors must compromise on what they are willing to accept to achieve their financial goals and objectives. This is the purpose of this risk profiling exercise.
- Risk Required – Level of risk required taken on investments to achieve the desired level of return.
- Risk Capacity – Level of Investment risk/and or losses you can afford to take.
- Risk Tolerance – Level of risk your comfortable taking.
Risk/Return on Investments: Risk can be thought of as the trade-off between risk and return, the higher the risk the higher for potential return and therefore loss, or in reverse the lower the risk (e.g. money in a savings account) the lower potential return.
Risk profiling takes into consideration your feelings and thoughts on various aspects of the economy along with your investing experience. e.g. your retirement, your estate, your investing experience, access to funds, income requirements, inflation, market movements, and liquidity requirements, etc. Your Investor Risk Profile is based on your responses to these types of questions.
Note: Below Investor Profiles are those recognised by Shartru Wealth Management P/L
Defensive
Investment risk must be very low and you are prepared to accept lower returns to protect capital. The negative effects of tax, inflation or generating sufficient return to fund your lifestyle choices will not concern you, provided your initial investment is protected.
Moderate
Investors seeking better than basic returns, but investment risk must be low. Typically, an older investor seeking to protect the wealth which you have accumulated, you may be prepared to consider less aggressive growth investments for a smaller proportion of the total portfolio.
Balanced
An investor who wants a portfolio to work towards medium to long term financial goals. You require an investment strategy that will cope with the effects of tax and inflation. Furthermore, your portfolio needs to generate a level of income so that you are not relying on capital growth or drawdown of capital (or delaying as long as possible) to fund living expenses.
Balanced Investors should be prepared to expect negative returns one year in every 4-5 years in normal market conditions.
LifeStyle Orientated
An investor who wants a portfolio to work towards medium to long term financial goals. You require an investment strategy that will cope with the effects of tax and inflation. Furthermore, your portfolio needs to generate a level of income so that you are not relying on capital growth or drawdown of capital (or delaying as long as possible) to fund living expenses.
Calculated investment risks will be acceptable to you to achieve these types of returns which will include a focus on producing a suitable income stream from the capital you have available.
LifeStyle Orientated Investors should be prepared to expect negative returns one year in every 3-5 years in normal market conditions.
LifeStyle Orientated Investors are different from Balanced Investors as if market conditions dictate they will hold less in defensive assets such as cash and fixed interest to ensure they are meeting their lifestyle objectives. This is particularly important in periods of low-interest rates where cash and fixed interest have a performance drag on the returns that can be generated.
Growth
Investors probably earning sufficient income from other sources to invest most funds for capital growth. Prepared to accept higher volatility and risks, your primary concern is to accumulate assets over the medium to long term. Your portfolio may include more aggressive investments including those that do not provide you with an income stream.
Growth investors should be prepared to expect negative returns 1 in every 3 years in normal market conditions.
High Growth
Investors prepared to compromise portfolio balance to pursue potentially greater long-term returns. Your investment choices are diverse, but carry with them a higher level of risk. The security of capital is secondary to the potential for wealth accumulation.
High Growth Investors should be prepared to expect negative returns 1 in every 3 years in normal market conditions.
As a High Growth investor, you may look to utilize gearing strategies to increase potential returns. Furthermore, you may do so with a concentrated investment mix like a residential property. Such strategies increase the chance of incurring losses and the quantity of such losses.
Once your risk profile has been determined and agreed upon by you and your adviser, the asset allocation of your investments can be allocated.