What is My Risk Profile and Why is it Important?
Your risk profile can be easily described. It is your capacity and willingness to take risks. It sounds simple …. but it’s not.
All investments have an attached level of risk. What we must do, is align our tolerance for risk with the level of risk of our investment portfolio
There are different styles of Risk Profiling, we cover two in the article.
The enticing attraction of investments is that those investments that demonstrate the highest returns, tend to have the highest level of risk. Volatile investments are those that have the biggest variations in value over a period of time. Most portfolios suffer some volatility in returns. The level of volatility will depend on how exposed your portfolio is to growth assets. The greater the exposure is to growth assets, the greater the potential for returns but also the greater the potential for loss. However, if we can build a portfolio where our ability to accept risk is lined up with the volatility of our investments, then our personal risk profile and the risk profile of our portfolio is in synch.
The long-term graphs of global share markets inevitably show excellent long-term performance.
This is because an analysis of long-term performance tends to hide short-term volatility.
Accordingly, the longer we are prepared to invest the less likely we are to suffer a loss due to short-term volatility.
We all have a view of our own ability to accept risk. But we often overstate this ability. Why, because we are making a decision now about risks that we will take in the future. The desire to achieve the historically lucrative returns of higher risk investments such as shares may be appealing now, but a future 40% fall in the share market can leave us feeling bruised, confused and used … and a lot poorer.
While some people are long-term investors and are able to see these market fluctuations as acceptable to achieve higher long-term returns, others are not.
What steps can we take prior to enduring such a future event? The answer lies in using an analytical questionnaire to help us determine our Risk Profile before we invest our hard-earned dollars. This makes sense. It means that we are better educated regarding firstly, the volatility of our investments, and secondly, how we will likely respond to a period of high volatility.
Risk Profiling Questionnaires
You will find many risk profile questionnaires available on the internet for free. Some will even recommend an appropriate portfolio with a suggested spread of assets that fit your risk profile.
There are generally accepted two different styles of establishing who and how you are with investing your money.
- Quantitative & qualitative analysis.
- It will cover specifics and;
- How you feel about different scenarios
- Money Personality questionnaire. Based more on your behaviour around money.
A Risk Profile Questionnaire is designed to consider the term of your investment and the level of risk that you are prepared to take. It focuses on your capacity to lose money.
1. Quantitave and qualitative: An example of a commonly used Risk Profile Questionnaire.
This questionnaire can help you understand your risk tolerance for financial decisions. Your risk tolerance is how comfortable you are with the possibility of losing money in exchange for potentially higher returns.
Section 1: Investment Time Horizon
When do you expect to need access to this investment?
- In less than 5 years
- In 5 to 10 years
- In 10 to 20 years
- In more than 20 years
Section 2: Risk Tolerance
How would you describe your attitude towards investment risk?
- I am very concerned about losing any money.
- I prefer to avoid large fluctuations in my investments.
- I am comfortable with some risk for potentially higher returns.
- I am willing to accept significant risk for the chance of much higher returns.
How would you react if your investments dropped by 10% in a short period?
- I would sell my investments immediately.
- I would be concerned but would wait to see if the market recovers.
- I would not be worried and would hold onto my investments. I would look for opportunities to buy more at a discount.
Section 3: Financial Goals
What is your primary goal for this investment?
- To preserve my principal (the original amount invested).
- To generate income to meet current expenses.
- To grow my wealth over the long term.
- To achieve aggressive growth for a specific goal.
Section 4: Inflation
How important is it for your investments to keep pace with inflation?
- Not very important, as long as my principal is safe.
- Somewhat important, but I am willing to take some risk for higher returns.
- Very important, I need my investments to grow at least as fast as inflation.
- Extremely important, I need my investments to significantly outperform inflation.
Section 5: Investor type
Which of the following investors do you think that you are:
- Very conservative?
- Conservative?
- Balanced?
- Growth?
- High Growth?
Okay, so now that we have begun our understanding of our capacity to accept risk, we are able align ourselves with an investment portfolio that is suited to us … and that’s important.
2. 5 Money Personality Types: Which One Are You? By Lisa Smith
Like almost everything else in life, your response to money is dictated by your personality. But have you thought about how your behaviour affects your bottom line? Understanding your money personality will help you shape your spending, saving, and investing.
- Understanding the various money personalities helps with investing, spending, saving, and finances.
- Five common money personalities are investors, savers, big spenders, debtors, and shoppers.
- Debtors and shoppers may tend to spend more money than is advisable.
- Investors and savers may overlap in personality traits when it comes to managing household money.
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Big Spenders
Big spenders love nice cars, new gadgets, and brand-name clothing. They are comfortable spending money, don’t fear debt, and often take risks when investing. -
Savers
Savers are the opposite of big spenders. They turn off the lights when leaving the room. They generally have no debt and may be viewed as frugal. Savers are conservative and don’t take risks with their investments. -
Shoppers
Shoppers often develop great emotional satisfaction from spending money. They can’t resist spending. Shoppers are varied in terms of investing. Some save regularly through their superannuation. Automated savings into an investment is an ideal way for the shoppers to get financially ahead. -
Debtors
They commonly don’t spend much time thinking about their money or tracking what they spend and where they spend it. Debtors generally spend more than they earn and are deeply in debt. -
Investors
Investors are consciously aware of money. They understand their financial situations and try to put their money to work. Regardless of their financial standing, investors tend to seek a day when passive investments will provide sufficient income to cover their bills.
Do you recognise any of the above behaviours? Perhaps there is an overlap in your money personality!
This is an area of particular interest to me as an RTT Practitioner and a Clinical Hypnotherapist. Over the years and working with many clients, I recognise patterns of behaviour and I know, all the behaviours are underpinned by beliefs. Some positive and some limiting!
“Jan is an incredibly talented Rapid Transformational Therapist and was able to access my subconcious mind easily through hypnosis to see how my past experiences shaped my beliefs around money.” Anastasia.
💬 Have questions? Email me directly or book your free Discovery Call to start a conversation about your goals.
🌱 Ready for a transformation? Check out my Money Makeover Course and take the first step toward financial freedom today!
