RISK PROFILING requires identifying 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 influential determinant of their choices – they are likely to be older or approaching retirement.
RISK AVERSE – these investors are naturally cautious and are seeking cash flow but are willing to perhaps lock their money away for a little longer in return for higher returns. Capital preservation is a top priority, but they may be comfortable to diversify and mix their investments up.
MODERATE – these investors are seeking growth and are prepared to take on some element of risk and invest for longer terms in anticipation of a capital gain. The generation of income and tax minimisation is also a goal.
MODERATELY AGGRESSIVE – typically confident educated investors, seeking growth over the longer term and prepared to suffer some volatility along the way. Long term capital growth is the intention with some volatility expected and tolerated and tax benefits maximised.
AGGRESSIVE – prepared to chance their capital in a volatile asset class in return for more significant expected returns and with time on their side.
It is not only attitude or personality traits that determine a person’s risk profile, but 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, as circumstances and opportunities evolve.
Asset classes most likely to be favoured or considered appropriate to each profile can now be superimposed on 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” stocks), while the AGGRESSIVE investor is comfortable to invest in domestic startups and INTERNATIONAL SHARES.
“Someone’s sitting in the shade today
someone planted a tree a long time ago.”
Income is a flow concept and wealth a stock concept. Saving some of your income makes possible the accumulation of assets or ‘wealth’.
Investment involves forgoing current consumption or ‘saving’ and redirecting that income to building a passive income in the future.
We have seen at the beginning of this course how vital investment is on a global, national and personal level.
Investment expands our capacity and options and provides a more satisfactory answer to the economic problem.
We are fortunate to live in a society that encourages self-determination, wealth creation and financial freedom in many ways.
The conferring of private property rights, the availability of tax incentives, and the adherence to the rule of law are just some of the benefits we enjoy that allow us the opportunity to take control of our futures.
Of course, all investment carries some risk. By definition, profit is ‘the return to risk’, but property investment provides a relatively straightforward and dependable way to invest and create a store of wealth for the future.
It also allows you to capitalize on the power of leverage – borrowing to increase the potential return of an investment.
Property investment is a long term strategy and therefore benefits from the ‘eighth wonder of the world’ – compounding!
Investing in a property that is increasing in value, even slowly over time, means that each consecutive year’s growth adds to an increasingly higher base.
A house purchased for $300,000 at 7% growth per annum (on average, remember the variations around the trend line) for ten years will just about double in value to $600,000.
This is why time in the market is more important than timing and why it is crucial to start as early as possible.
According to Steven Covey, author of “The 7 Habits of Highly Effective People”, the number one habit is Be Proactive
– make decisions to improve your life through the things you can change.
Abundance isn’t finite, there are opportunities for ordinary Australians to create wealth, but you need to know about them and be prepared to act on them!
It comes down to knowledge and attitude. Investment provides the opportunity for financial freedom and self-determination.
Most wealth isn’t inherited; it is CREATED by motivated and informed people who think differently about debt, plan and adopt a wealth creation strategy.
It’s up to YOU!