Understand the Risk Before Deciding Where to Invest
Your risk profile indicates your tolerance for risk, and you should understand yours before deciding on where you invest your money.
You should always be wary of accepting investment advice from other people – even if they are successful investors – because their risk profile is different from yours. Your brother-in-law who is making a killing by trading options on the U.S. stock market might be urging you to do the same, but his risk profile isn’t the same as yours. He might be taking more risks, working to a different plan, using a system he knows well … or even heading for a spectacular fall. All of those things might be acceptable to him, but they aren’t necessarily right for you.
Broadly, there are three types of investors:
- Aggressive: Aggressive investors have a greater appetite and tolerance for risk, and usually have a higher proportion of growth assets (shares and property) in their portfolios. Those assets might also be in more volatile areas – for example, shares in start-up companies or property in mining towns.
- Conservative: Conservative investors have a lower risk tolerance, and are more likely to have higher holdings of defensive assets, such as cash and fixed interest assets.
- Balanced: Balanced investors fall somewhere in the middle, with a balanced portfolio across all asset classes. If they own shares and property, they are likely to be in more stable areas – for example, blue-chip shares or regular houses in big cities.
It’s important to note that none of these risk profiles are better or worse than any other. Aggressive investors aren’t headstrong or reckless; rather, they are prepared to take more risks, but balance that by increasing their knowledge. Similarly, conservative investors aren’t timid or fearful; they are simply investing in a way that gives them peace of mind.
A simple way to gauge your risk appetite for a particular investment is to ask whether you could sleep well at night. If you’ll be tossing and turning with worry, it probably isn’t right for you. A good financial adviser will ask you to complete an investment risk profile questionnaire before offering any advice. This will show you your position on the Aggressive/Conservative scale, and that will give you a general guide to the investment class mix that will best suit your needs. Remember always be true to yourself and who you are, trust your own instincts they will never lead you astray.
Posted by Tracey Sofra at August 10, 2017