What is a Financial Risk Profile?
Most of you think of risk as something negative, but there are various types of risks associated with financial markets and individual investments. The key to successful investing is knowing the difference between the risks you can afford to take for the potential reward and those that will make you lose money!
Note that, it's also important to understand how an investment can protect you from certain risks or exposures.
Understanding financial risk can further help people make better investment decisions. The better you understand these risks, the easier it will be for you to make wiser decisions when choosing investments.
💡 Quick Tip: Because risk varies by asset class, having a portfolio that includes a variety of asset types can help minimize overall risk.
Why is it important to know your financial risk profile?
Understanding your financial risk profile will help you recognize what types of risks you can and cannot handle, and that will ultimately increase the likelihood of your success as an investor.
Every single person has a different risk profile as the risk appetite depends on psychological factors, loss bearing capacity, investor’s age, financial goals, income & expenses and many other things.
For example: Risk-averse investors are willing to accept lower returns in order to protect their money, while others looking for high returns on investments are willing to take more risks.
If you try to put yourself into investment classes that are different from your risk profile, then either you’ll end up losing money or you will be unable to build wealth or worst of all, a combination of both.
On the other hand, the investor who understands the risk profile and invests in suitable products will achieve better results.
To assess your financial risk profile, you should ask yourself some questions. Here is a list of the most important ones:
What are my investment objectives?
How close am I to achieving my investment goals?
What level of volatility can I accept in the short-term?
What are my risk management strategies?
How would I react if I lose money?
Do I have time to wait for risky investments to pay off?
Do I have any debts or payments due soon (mortgage, car loan, etc.) and will the returns cover those costs?
And more...
How can you discover a financial risk profile?
One way to discover your risk profile is by completing financial risk assessment tests. Some are provided for free, but they may not provide you with the best analysis.
Financial apps like Finzard also have the ability to help you more accurately determine your risk tolerance and will give you a better idea of what type of investments are appropriate for you.
Types of financial risk profiles
There are 5 different types of financial risk profiles:
Risk Profile | Investor(Your) Profile | Possible Asset Allocation* |
|---|---|---|
Conservative | These investors are most concerned with security. They usually seek lower returns for the sake of preserving their capital in case of an unforeseen event or crisis. | Equity: 0-10% Debt and others: 90-100% |
Moderate | These investors are more concerned with growth than security or income, but they still want their capital to be somewhat safe from an economic crisis | Equity: 10-30% Debt and others: 70-90% |
Moderately aggressive | These investors are generally willing to take on more risk, so they seek lower returns on investment with the goal of achieving higher returns. | Equity: 70-90% Debt and others: 10-30% |
High-risk investors | These investors are typically most concerned with achieving returns that may not necessarily beat the market but will compensate them for the risk they took on. | Equity: 70-90% Debt and others: 10-30% |
Very high-risk | These investors are the riskiest of all investors and like to take on as much risk as possible. They typically seek the highest returns available. | Equity: 90-100% Debt and others: 0-10% |
Take control of your Personal Finance Planning and Wealth Management, Download and Install Finzard — Your Personal Financial Wizard from Google Playstore or shoot your questions on pr@finzard.com.
For more information: www.finzard.com
Written by Gouri Chowbey for Finzard
Comments