How do you determine your risk profile?
10 April 2018
Risk is the key to your investment strategy, so it’s important to understand what it means and how you’ll take it into account when making investment decisions.
There are many kinds of investment risk, including the possibility that you could lose money by pursuing a particular investment strategy or investing in a specific asset class. On top of that, everyone has a different appetite for risk. For example, some of us may be comfortable investing in high risk assets such as shares while others may prefer investing in low risk assets such as term deposits.
Before determining your risk appetite, it’s important to understand the risk-return trade off. Put simply, the more risk you’re willing to undertake, the higher your potential rewards may be. However, higher returns come with higher risk that the value of your investment may fall.
Read more: Understanding Investment Risk
Here are three simple tips to help you determine your risk profile.
1. Understand the risk profiles of your asset classes
A good approach is to understand the various risk profiles of some of the main asset classes, so that you can work out what the right mix of assets might be for your portfolio.
Generally, shares are considered to be among the higher risk asset classes. Assets in this category may experience periods of high volatility, which means their values rise and fall more frequently. Conversely, asset classes that are lower risk – such as term deposits – generally experience lower levels of volatility, and therefore experience lower returns.
Property is often considered to be less risky than shares, but more risky than an asset class such as fixed interest. Property securities listed on a stock exchange tend to exhibit a higher level of volatility (similar to shares), than unlisted property and accordingly involve higher risk.
Generally, fixed interest is considered to be a less risky asset class. This is because it tends to offer investors a stable return that is determined by the income paid and the change in value. Just like shares and property, the value of fixed interest investments may go up and down.
Cash is typically the lowest risk asset class, but also offers the lowest potential returns. The reason for this is that returns may be less than inflation, effectively reducing the purchasing power of your investment.
2. Match investments to your investment horizon
As an investor, it’s important to think about how long you’re investing for. If you’re early on in your investment journey and have time on your side, you may be able to accept the greater volatility that comes with ‘growth investments’ like shares or property which may rise in price over the long term and potentially provide a higher return.
3. Spread your risk
Different asset classes tend to perform better at different times, so it’s possible to reduce volatility by investing within different asset classes. This is known as diversification, or not putting all your eggs in the one basket.
Before you begin any investment journey, it’s important to know your risk appetite. A qualified financial planner can help with that. If you learn your risk appetite and invest accordingly, you’ll feel less anxious in periods of volatility. When you’re ready to invest, contact a Suncorp Home Loan specialist —we’ll run you through your options.
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