Deciding to get more serious about your current investments or thinking you would like to set up your first official portfolio? Before doing so, you need to think about not just how much you’re willing to invest, but how much your willing to risk. All investments come with risk, some more than others. Understanding your investment risk profile is an important first step of financial planning, but don’t worry, you don’t have to do it alone. Your financial advisor knows all the questions to ask and can help to assess your risk tolerance before you start investing.

Understanding risk profiling

A risk profile is determined by evaluating both your willingness and your financial ability to take risks, usually in the form of a questionnaire or survey as well as a discussion with your financial advisor. Once this is completed, you’ll be given a risk profile score which will help guide your future investment decisions. The 3 key areas covered with this questionnaire are as follows:

1. What are your financial goals and time frames?

Although everyone wants to earn as much interest as possible on their investments, there are other goals to consider as well. Are you saving for retirement, a down payment on a home, a luxury trip around the world, or just want to grow your savings? Each goal will likely involve a different level of risk. It’s also important to look at your financial time frames for each goal. For example, if you’re under 30 and saving for retirement at 65, your risk profile will be different from someone who has a shorter time frame to invest.

2. What’s your current financial situation?

Before determining how much money you can invest (or risk), it’s important to have a solid handle on all of your finances, including your total assets, debt load, regular expenses and your income. This information will often vary over time, so it’s important to make note of any changes in your financial situation as it can impact your investments.

3. What’s your investment approach?

In other words, how much risk are you willing to take with your money? Are you more comfortable with a portfolio that has guaranteed investments that will slowly build (risk-averse), or do you want the high-yield investments that come with a lot more risk (risk-seeker)? When you understand your own approach to investing, it puts you more in control and it helps your investment advisor help map out your strategy.

Looking at various risk profiles

Now that we understand more about how and why risk profiles work, let’s look at some of the key categories that a risk profile falls under. From this list, you and your financial advisor can select investments that are most in harmony with your personal style and preferences:

Conservative – or low risk

A conservative risk profile is focused around stability and minimal losses, usually over a shorter investment time-frame. There is a fairly wide range between ultra-conservative up to moderately conservative approaches, which is why the survey and analysis is so important to clearly assess your risk profile.

 Balanced – or medium risk

A balanced risk profile is all about diversity. It’s got a mix of more secure investments as well as ones that may yield more growth. With a balanced risk profile, you understand market volatility and can accept the risk, but you also crave some stability.

Dynamic/aggressive – or high risk 

With a dynamic or high-risk profile, you recognize that the potential for high growth is important to you, and thus you’re willing to accept more market fluctuations and volatility. Usually, these higher risk investments see the most rewards in the long-term as opposed to the short term.

Over the years your own risk profile may change along with variations in your financial situation, which is why it’s important to review your portfolio often. Always remember though, that stocks, bonds and investments are unpredictable, and even with the most careful planning, there is no way to ensure an exact return year after year. If you’re not sure about how to update your portfolio or how to get started with investments, be sure to talk to a professional financial advisor. It’s my job to sit down with you, assess your risk profile, explain your options and help you set up a portfolio that suits you. Connect with me today at 705-315-0516 and let’s make an appointment to get your investments working for you.