When it comes to investing, how much risk you are (or should be) willing to take on depends on your risk profile. Here’s what that means and how to determine yours.
When deciding where to invest your money, or where you’d like your super fund to invest it, it pays to take stock of a few things in your life before making a decision.
You’re not going to be making an informed decision if you don’t understand your personal risk profile.
Basically, a risk profile is an evaluation of an individual’s ability and willingness to take on financial risk in their investments.
Your risk profile will change as you age and your income changes
Willingness to take on risk
This refers to your risk aversion. If you really don’t like to see the value of your account drop, and you are willing to forgo potential profits to achieve this, then you have a low risk aversion.
On the flip side, if you are driven by achieving the highest return possible and are willing to endure the stress of seeing your portfolio’s value drop, then your risk aversion would be high.
Ability to take on risk
This is referring to the reality of your financial position before investing. This measure is a little more objective than your risk willingness.
Generally speaking, your ability to take on risk depends on your overall net worth. It is a measure of your financial independence from any potential losses your investment may have.
The ability to take risks is evaluated through a review of an individual’s assets and liabilities. An individual with many assets and few liabilities has a high ability to take on risk. Conversely, an individual with few assets and high liabilities has a low ability to take on risk.
Your risk ability is also influenced by your age. For example, if you are in your late 20s with a stable job, you are unlikely to need to tap into your savings for retirement any time soon. Since your time horizon is relatively long, you are able to invest more in shares that are relatively riskier and advisable for long-term investors.
However, if you are already in your 50s and closer to retirement, it is generally advisable to allot fixed-income investments such as bonds in your portfolio.
Also read: What to consider before switching super funds
Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
