Financial Advisor in Raleigh NC: Investment Risk Profile

Every investor has a different risk tolerance with regard to their investment selections. A risk profile is a broad view of an individual’s risk tolerance. Before investing it’s important to understand your risk tolerance and you may want to work with a financial advisor who can help find the right investments to align with those expectations.

Risk Profile Defined

A risk profile is an important tool that is used by investors to ensure that their portfolios are properly allocated across different asset classes. It helps an investor identify the level of risk they are willing to take, known as their risk aversion. This risk profile can be determined by various factors, including the investor's age, financial goals, and risk tolerance.

The risk profile helps the investor determine the right balance between risk and return when choosing investments. This balance is essential to achieving the investor's financial goals while also minimizing the risk of losses. The risk profile also helps an investor identify the most appropriate asset allocation for their portfolio, based on their risk appetite and the amount of money they are willing to invest.

An investor who is risk-averse may opt to maintain the value of their portfolio, foregoing potential capital appreciation. This means they are not willing to take on the risk of potential losses associated with a rise in market volatility.

Conversely, an investor who is seeking higher returns may be willing to accept more risk and market volatility in order to get a higher return on their investment. This means they are willing to take on the risk of potential losses associated with a rise in market volatility in order to potentially get a higher return on their investment.

Often, investors evaluate their ability to take on risk by reviewing their assets. An individual with many assets but few liabilities may take on more risk. On the other hand, if an investor has a lot of liabilities and few assets, they may be more risk-averse. For example, if an investor has a retirement fund, emergency savings, no mortgage, and other investments, they may be willing to take on more risk so they can potentially reap greater rewards.

However, an investor’s willingness and ability don’t always match. Just because an investor has a substantial amount of assets and very few liabilities doesn’t mean they are willing to take on risk. They may prefer to maintain the value of their accounts and play it safe.

Risk Profile Considerations

Creating a risk profile typically starts with completing a risk profile questionnaire. This questionnaire usually requests information such as your age, recent major life changes, income, and investment comfort level. Based on your answers, you will receive a profile score. This score will help you to determine what types of investments are best suited for your risk tolerance.

Additionally, you may use the score to compare different investments and their potential risks. It is important to remember that your risk profile can change over time and you should revisit your risk profile if you experience any major life changes.

Types of Risk Profiles

There are three main categories of risk profiles. Each speaks to the level of risk an investor is comfortable undertaking.

However, there are different levels within each profile that account for variables. It may be helpful to review the overall outline of the profile that most aligns with your desired risk.

●      Conservative: This means you want minimal volatility. Your ideal investments may offer protection with some kind of return. If you have a conservative risk profile, you may want to choose investments such as CDs or money market accounts where you will see very little volatility. Generally, your time horizon is low. Therefore, you’re unwilling to take on unnecessary risks.

●      Moderate: This is for people who want to earn a moderate to high return but don’t want to take on too much risk. If you’re a moderate investor you may choose a balanced portfolio strategy and have a moderate time horizon.

●      Aggressive: An aggressive portfolio seeks the highest return possible. An investor may have a longer time horizon and may be willing to stomach market volatility in many different economic conditions. Aggressive investors have usually experienced investors who understand the inner workings of the market and economy. They are not scared to invest in start-ups that may yield a high return. Some young investors may take more of an aggressive approach since they have a longer time horizon.

The Bottom Line

Your investment strategy should be a combination of what you’re comfortable with contributing as well as what you’re willing to accept in return. If the idea of losing any money is scary to you, it’s likely you have a conservative risk profile. If you believe in trying to reach the highest return possible – even if it means you could lose money – you’ve got a more aggressive investment strategy.

Ideally, your risk profile should be fluid. It may change based on several factors including your salary, disposable income and age. If you’re early in your career and don’t have a lot of extra cash or assets, you may have a somewhat moderate risk profile.

As you earn more, you might become more aggressive. However, as you age and get closer to retirement, you may become more conservative.

Sources

https://smartasset.com/financial-advisor/risk-profile

https://www.wallstreetmojo.com/risk-profile/

https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Investor-Profile-Questionnaire.pdf

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.