Almost all investments that you make are borne with a certain degree of risk. Where some may seem highly risky, in a few others, the risk may be minimal or negligible to you. By the term risk here in investments we are talking about the variability of the rate of return. It is a possibility of your money increasing or decreasing in value from your expectations. The level of risk you are willing to bear determines your specific risk profile.
Knowing what your risk taking ability is very vital, when it comes to choosing investments. It isn’t a difficult task to gauge it. A small effort put in to understand it could help you make better and wiser investment decisions that are most suitable to you.
Your Risk Profile is governed by…
…various factors. To begin with – your age and investment time horizon.
Age is a prime factor in determining how much risk you are willing to bear. At a younger age, with lower responsibilities, the ability to take risk is far higher. As you progress in age, increasing family commitments reduce your ability to take risk.
Another important factor in determining your risk profile is your investment time horizon. The time you stay put in an investment depends on your financial goal. If you have long term goals, a riskier investment may suit you fine as it would let you withstand the ups and downs of the markets and handle more risk in comparison to a short term one.
The other significant factor is your surplus cash position. Having surplus cash in hand after fulfilling all mandatory obligations, could mean you sure do have a better risk taking appetite. Such surplus cash acts as a buffer to hold on to, in case of experience any loss.
So Are You the Conservative, Moderate or Aggressive Investor?
The Conservative Investor
As a conservative investor, you have reasonable expectations out of your money. You would refrain from putting your principle money/capital to even a bit of risk. You would ideally choose financial products that do not fluctuate much in value. As a conservative investor though you have the peace of mind, you may miss out on the growth opportunities in times of an upward trend in the economy.
The Moderate Investor
As a moderate investor, you would want your investment to grow significantly, and thus tolerate a certain amount of volatility in the market. Your portfolio is diversified across sectors with investments in a few safe bonds and a few blue chip stocks. This approach may not fetch you very high returns when the market goes up, but it sure will not fall much in bad times.
The Aggressive Investor
As an aggressive investor you only look out for growth of your money. Of course in good times, you would make a considerable amount on your portfolio, but you also stand to lose it all in a downfall.
Getting your Risk assessed- Seeking the help of Professionals
To get a better judgment of your risk profile, you could seek the help of a Certified Financial Planner. Planners categorize you in the above mentioned risk groups by using questionnaires and gauging you in hypothetical situations. Nevertheless the best was to understand your individual risk profile, is with one’s own personal experience. As you gain more experience in investing, you begin to have a better idea of how much risk you can actually withstand, and you would invest in only those products that you are comfortable with, thereby ensuring peace of mind.