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.