BY JOHN ELLIS, FINANCIAL ADVISOR
WHEN investing, risk relates to the possibility you might get back less than you put in. Like most things in life, no investment is without risk. However, you’ll have your own ideas about the risk you’re comfortable with.
It’s not only how much risk you’re prepared to take, known as ‘attitude to risk’, but recognising how much you can afford to lose, known as your ‘capacity for loss’.
You might be willing to take great risks, but would losing money leave you in financial difficulty? It’s equally important that you understand your capacity for loss and are comfortable with it before you choose investments that match your circumstances.
So, how much risk are you prepared to take?
The first step is establishing your attitude to risk by outlining your aims, personal circumstances, and views on risk.
The second step is to use a Risk Profiling Tool(s). These tools ask a number of questions and based on your answers the tool generates one of seven risk profiles to help with your decision making.
Your Financial Broker will then explain the asset classes that match, and you will then be able to make an informed choice.
The seven profiles are as follows –
- If you are a ‘very low risk’ investor, you are not willing to accept any significant risks with your money, accepting the prospect of low returns to achieve this. Funds with a Risk Profile of Type 1 typically hold investments which see little change in value from day to day, such as short-term bank deposits.
Over the long-term, high returns are very unlikely, and the returns may not keep pace with inflation. - If you are a ‘low risk’ investor, you are likely to accept limited risks with your money and will want to try to avoid large fluctuations in the value of your investment, accepting the prospect of more modest returns to achieve this. Over the long-term, high returns are unlikely, and the returns may not keep pace with inflation.
- If you are a ‘low to medium risk’ investor you are likely to accept some risk in return for the potential of higher investment gains over the long-term. You will want to try to avoid large fluctuations in the value of your investment but accept there will be some fluctuation particularly over the short-term.
- If you are a ‘medium risk’ investor, you are likely to accept increased risk in return for the potential of good investment gains over the long-term. You accept there will be significant fluctuations in the value of your investment, particularly over the short-term. However, you will want to limit the amount of your money held in more risky investments.
- If you are a ‘medium to high risk’ investor, you are likely to understand that the value of your investment can go down and up sharply with the potential for greater returns over the long term.
- If you are a ‘high risk’ investor, you are likely to aim for high possible returns and accept higher levels of risk, recognising the value of your investment may fluctuate very sharply, particularly over the short-term.
- If you are a ‘very high risk’ investor, you are likely to aim for the highest possible returns and accept the highest levels of risk, recognising that the value of your investment may fluctuate very widely, particularly over the short term.
Finally, are you concerned with the current volatility in the markets? Are you about to change your investment strategy? Take some time with your Financial Broker to review and refine your current investment approach rather than making a sudden decision based on fear and anxiety.
Remember, history has shown that the longer you keep your money invested, the greater the possibilities of a positive outcome.
