Investors have different attitudes towards risk. Before you start investing, it is essential that you understand your risk profile or your tolerance towards risk. Some assts fluctuate more dramatically than others; especially in the short term. Understanding your tolerance to risk means that you can be more comfortable with these fluctuations and helps to create that all important “sleep at night” factor.
Once you have understood your risk profile, you or your adviser can determine the appropriate asset allocation for your portfolio. For instance, if you were extremely risk averse and had sufficient funds to allow you to achieve your goals with very modest returns, you may be comfortable investing in only cash and cash-like assets. Investors with a higher tolerance for risk may invest entirely in direct shares; which will produce greater returns over the longer period but experience more volatility along the way. For most investors, a mixture of defensive assets (like cash) and growth assets such as shares is the way to go. But until you understand your own risk profile, it is difficult, if not impossible, to create a portfolio that suits your needs.
There are many tools used to help determine your risk profile. Usually your adviser will go through a questionnaire with you and your partner as well as ask you relevant questions through the fact gathering process that will give him or her clues as to where you may sit in terms of risk. Other factors that may be taken in to account apart from a questionnaire are your age, investment experience, whether you are looking to invest all of your savings or just a portion and; assuming the worst case scenario where the investment loses a large part of its value, whether you have the time and capacity to recoup those losses.
The best risk profiling tools use Psychometrics, a blend of psychology and statistics to form a view as to an investors risk tolerance by conducting a question-and-answer discussion about an investors attitudes, values, preferences and experiences in matters involving financial risk.
For a short time only, I am offering a free risk tolerance profile exercise which you can complete online. Just leave your name and email address details and I will forward the online questionnaire to you. Once it has been completed, you will receive a detailed report on your risk profile and what it means to you as an investor.
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