Risk Profile - Your Appetite for Risk.....

One of the first things you need to do before making any investment decision is determine your Risk Profile. Your Risk Profile is an assessment of how much risk you are prepared to take or accept when investing in an asset. In a previous blog - Risk versus Return - I discussed how the return on an investment asset was linked to the risk associated in investing in that asset. Each investment asset has its own risk profile which you must evaluate against your personal risk profile. In this way you can then match the risk profile of you and the investment asset.

Risk Profile - In More Detail

• risk should be thought of as the trade-off between risk and return - the higher the risk the higher the return and conversely the lower the risk the lower the return. A risk profile determines your willingness to take on that risk.

• your risk profile takes into account your overall appetite for risk, your investment timeframe, your financial goals and your financial position.

• you must establish your appetite for risk before you make any investment decision. If you don’t then you might find you have exposed yourself to more risk that you would like and over an incorrect time frame. You then may be forced to change the investment - at a lower value.

• a risk profile can be completed in many ways but the normal approach is to complete a questionnaire. The questionnaire will ask you a series of questions designed to understand your attitude to investing, how you may react during certain market and economic conditions and your general understanding of the markets. You can view examples of these questionnaires on-line.

• the main things your risk profile is measured against are:

  • age

  • dependents

  • knowledge and experience of markets

  • type of income

  • ability to save

  • timing of cashflow requirements (withdrawals)

• once you have established your risk profile this will then help you decide on which asset to invest in. You can match your appetite for risk against the investment risk of the asset. The key thing is to decide on what level of investment risk you feel comfortable with before you invest.

Image source https://quaystreet.com/investor-hub/risk-profile

Risk Profile - Summary

• risk should be thought of as the trade-off between risk and return.

• you must establish your appetite for risk before you make any investment decision.

• The key thing is to decide on what level of investment risk you feel comfortable with before you invest.

• Ask yourself these simple questions to help assess your appetite for risk:

  • will I “sleep at night” if I make this investment?

  • can I afford to lose this money I am investing?

  • how many months of losing money on my investment can I accept?

Good luck and good investing!

James

Title image source https://normanmarks.wordpress.com/2011/04/14/just-what-is-risk-appetite-and-how-does-it-differ-from-risk-tolerance/