Working out your Risk Profile

It is vital that you know your Risk Profile as everyone is different in terms of tolerance of risk. Factors affecting that tolerance include age, wealth, and years of earning remaining.

There are three basic Risk Profiles.

Aggressive – typically:

• Have a high tolerance of risk
• Accept that they could lose a high percentage of the money they have invested
• Have a longer timetable of investment allowing them to recover from major losses

Balanced – typically:

• Have a moderate tolerance of risk
• Are willing to take the chance of losing a small proportion of their investment
• Accept that higher returns mean higher risks
• Have a mid range timetable of investment allowing the chance of partial recovery

Conservative – typically:

• Have a very low tolerance of risk
• Want to protect the money they have already invested
• Are concerned about how economic changes will affect their investments

Most investors are a mix of these categories, with expectations of increased return as risk tolerance increases. Conversely, sensitivity to performance volatility decreases as risk tolerance increases.

Your Risk Profile is also related to your primary financial goals such as:

• Preserving your assets
• Accumulating wealth
• Saving for a major expense
• Buying a property
• Saving for retirement

You need to rank your goals in order of priority to determine which is your primary financial goal. The timeframe of this primary financial goal will influence which category you fall into.

You can work out your Risk Profile from the following questionnaire.

How old are you?
1. under 45
2. 45 to 55
3. 55 to 65

What is your annual combined income?
1. over $100,000
2. $50,000 to $100,000
3. below $50,000

How secure is that income or your business?
1. very secure
2. reasonably secure
3. not very secure

How long do you expect to have children dependent on you?
1. not at all
2. up to 10 years
3. more than 10 years

How long do you expect to be earning and so saving for your retirement?
1. over 20 years
2. 10 to 20 years
3. less than 10 years

What level of savings do you have at present, considering your age?
1. high
2. average
3. low

What are you like as an investor?
1. not worried if my investment falls in value in the short term
2. will take a small risk but would not like to be exposed to a major loss
3. very conservative – I hate losing money

Add up your answers:
a tick for a 1. is one point
a tick for a 2. is two points
a tick for a 3. is three points.

Results – your Risk Acceptance Rating:

5-10: you can afford to be aggressive with your investments and invest for strong growth in the long term.

11-15: you should have a balanced portfolio with a limited downside.

16 plus: you are a conservative investor and should protect your investment at all costs.

A quicker way of working out an appropriate level of risk is to subtract your age from 100.
So if you are 45 years old, 100 – 45 = 55
In that case:
55% of your investments should be in growth investments and
45% in conservative investments.