Your risk profile: Why you should understand it and revisit it

Understanding the risks of investing

No two people are the same, so your risk profile and risk tolerance won't look exactly like someone else's. There are many factors that can influence a person's risk profile, like how long they want to invest for, what they are saving for and how much of their portfolio they are investing.

Your financial adviser will be able to help you calculate an accurate risk profile. From there, they'll be able to suggest investments to you that match your risk tolerance.

How risk profiling works

Your financial adviser will give you a questionnaire to determine what your risk profile is. Here is a list of some of the questions you might be asked.

1. How old are you?
Your age affects the amount of time that you have to invest. Younger investors can afford to invest in riskier asset classes like equities, because they have more time to recover if their investments take a dip. Older investors who are nearing retirement are safer investing a greater percentage in less risky asset classes, like cash and bonds.

2. How long can you keep your money invested before withdrawing it?
The longer you leave your investment untouched, the more returns it will generate. If you have more time, you also might be able to include more risky assets in your portfolio.

3. If you have a current investment, what is the value of this investment (for example, unit trusts, investment property, etc)?
Know what existing investments you might have. This will help your financial adviser work out their total worth, determine how much is invested where and spot any gaps or opportunities. This holistic view will help your adviser guide you on how to maintain the right balance of diversity among asset classes in your portfolio as a whole.

4. How much do you expect your income to grow in the next few years?
An increase in income means that you might be able to invest more in the coming years.

5. How will you pay for your and your dependants' big expenses before you retire?
If you can pay your daily living costs using only your salary, your investments will be more secure. Ask yourself how likely it is that one of your investments will need to be liquidated to pay off a house, or to pay university fees, for example.

6. How would you react to fluctuations in the market?
Conservative investors are usually more sensitive to dips and rises in the market than aggressive investors are. Would you be comfortable if your investments took a dive today but recovered in a few months' time?

Once you've finished the questionnaire, your financial adviser will be able to tell you if you are a conservative, moderate or aggressive investor. Together, you'll then be able to decide how much you want to invest in each asset class.

Don't be afraid of risk!

Risk is an unavoidable part of investing, so being too risk-averse might harm your investments, or limit them from being as successful as they could be. Work with your adviser to better understand risk and learn how to use it, instead of fear it.

Things change, and so does your risk profile

As time goes on, it's a good idea to revisit the risk profiling questionnaire you did with your financial adviser when you first started investing. Your approach to investing is likely to become more conservative as you get older, there is also a chance that you'll become more comfortable with the risks of investing and willing to be more aggressive.

Not revisiting your risk profile is a mistake that might impact the returns your investment could generate.