RISK PROFILING is finding out about the potential investor’s attitudes, situation, goals, preferences and experiences to determine where they may be comfortable and confident on the risk and return spectrum.
- CONSERVATIVE – are very cautious and seeking income that is predictable and stable – capital preservation is crucial – peace of mind is the most important determinant of their choices – likely to be older or approaching retirement.
- RISK AVERSE – these investors are naturally cautious and are seeking cash flow but are willing to to perhaps lock their money away for a little longer in return for higher returns. Capital preservation is a high priority but they may be comfortable to diversify and mix their investments up.
- MODERATE – these investors are seeking growth and so are prepared to take some element of risk invest for longer terms in anticipation of capital gain. The generation of income and tax minimization is also a goal.
- MODERATELY AGGRESSIVE – typically confident investors, seeking growth over a longer term and prepared to suffer some volatility along the way. Long term capital growth is the goal with some volatility expected and tolerated and tax benefits maximised.
- AGGRESSIVE – prepared risk capital in a volatile asset class in return for higher expected returns and with time on their side.
So, it is not only attitude or personality traits that determine a person’s risk profile, it’s also the investment outcome they NEED and their CAPACITY to invest:
Risk profiles are meant to provide a guideline and are not prescriptive nor set in stone, they may in fact change over time, circumstance and opportunity. Asset classes most likely to be favoured or considered appropriate to each profile we can now superimpose the asset classes trade off between risk and return we saw in Lesson Two
CONSERVATIVE and RISK AVERSE investors are likely to favour CASH and FIXED INTEREST, while MODERATE investors are likely to prefer PROPERTY. MODERATELY AGGRESSIVE profiles align with PROPERTY and some AUSTRALIAN SHARES (perhaps “Blue Chip” ), while the AGGRESSIVE investor is comfortable to invest in domestic and INTERNATIONAL SHARES.