Investing is all about taking chances, but how much risk should you take on? That's where risk profiling comes in.
Advisers use this nifty process to figure out just the right amount of risk for you. It's all about balancing what you need, what you can handle, and how much uncertainty you're comfortable with in your investment journey.
So what does risk profiling involve and what impact does it have on where you invest your money? Read on to find out.
Risk profiling is about figuring out how you feel about taking risks in your investments. Wondering how it's done? It boils down to three key factors:
When you chat with a financial planner, you'll dive into questions about your finances, goals, and how long you plan to invest. It's like taking a personality quiz for your money - understanding what you want to achieve and when.
This helps shape a risk profile that's just right for you.
Your financial planner will use the information you provide in this questionnaire to determine your risk profile. Your risk profile takes into account a number of factors, including:
The aim of risk profiling in financial planning is to not only determine the financial risk you have the capacity to take, but also the level of risk you are willing to take.
Your risk profile outlines the level of investment risk you are willing to accept. Generally speaking, the greater the risk with an investment, the greater the potential returns.
However, opting for riskier investments also means you need to accept the potential of losing money.
When you fill out a risk profile quiz – you can see some sample risk-profile quiz questions below – your answers will be graded with a score.
Your total score at the end of the quiz will be tallied so that you can be classified into a particular investment style.
The names given to risk profiles vary, but profiles tend to fall into one of the following categories along with real-life hypothetical scenarios to help you understand:
| Response | |
|---|---|
| No | 36.85% |
| Yes | 34.56% |
| I don't know what that is | 28.59% |
Curious about what a risk-profile quiz looks like? Here's a snapshot:
Your financial planner will use the answers you provide to determine your risk profile, and then match you with an investment portfolio that matches that profile.
How you perceive risks has a big impact on which investments are best suited to you. Generally speaking, investments can be split into two categories:
The money you invest will be allocated to a mix of defensive and growth assets, with the exact asset allocation chosen based on your risk profile.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
If your risk profile is conservative, your portfolio will be skewed towards investments that provide safe, guaranteed returns, such as cash and term deposits. In fact, defensive assets could make up 75% or even more of your investment portfolio.
On the other hand, if you're classified as an aggressive investor, your portfolio will contain a much larger allocation of high risk/reward investments, for example Australian and international shares.
If your risk profile is balanced, your investment portfolio will include a combination of growth and defensive assets, perhaps skewed slightly towards either asset class depending on your personal circumstances.
It’s not just traditional financial planners and advisers that use risk profiling; you will often also need to fill out a risk profiling questionnaire when you sign up for a robo-advice service.
When you open an account with a robo adviser, you will need to answer a few simple questions about your investment amount, your investment goals and your tolerance for risk. These answers will determine your risk profile, and you’ll then be assigned an investment portfolio with an asset allocation designed to suit your appetite for risk.
For example, if you sign up for an account with Raiz Invest (previously Acorns Australia), you’ll be asked to provide details about your financial situation, investment goals and time frame.
Based on your answers, you are then matched with one of five portfolios of exchange-traded funds (ETFs) designed to match different levels of risk and return: Conservative, Moderately Conservative, Moderate, Moderately Aggressive and Aggressive.
Remember: Your financial-risk capacity and your attitude to risk will change over time, so don’t assume that once you’ve chosen an investment portfolio based on your risk profile you can simply “set and forget”.
Review your risk tolerance and your investment portfolio with your financial planner regularly to make sure your investments are still suitable for your needs.
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