Getting to know your risk profile

The Benefits of Aligning Your Portfolio With Your True Risk Profile

• Stay the Course: When your portfolio aligns with your actual risk tolerance, you’re less likely to panic and make impulsive moves during market fluctuations. Taking emotional decisions with your investments can often be one of the worst mistakes you can make.
• Better Long-Term Results: History shows that investors who stick with a well-matched plan tend to outperform those who jump in and out of the market.  “Time in the market” is more important than “timing in the market”.
• Peace of Mind: The right risk profile means you can weather volatility with confidence, rather than anxiety.  There’s no point chasing higher returns if it means you won’t be able to sleep at night.
• Goal Achievement: By staying invested, you give your money the best chance to grow and help you reach your financial goals—whether that’s saving for your retirement, a new home, or your child’s education.

What Factors Shape Your Risk Profile?

A blend of personal, financial, and psychological factors shapes your risk profile. Understanding these elements is crucial for creating an investment strategy that aligns with your needs and comfort level.

• Investment Amount (Assets and Liabilities):
  How much of your wealth are you investing, and what is your overall financial position? Do you have a large enough emergency fund? Investors with substantial assets and minimal liabilities generally have a higher capacity to take risks, as they can better withstand potential losses. Conversely, those with significant debts or limited savings may need to be more conservative, as they have less of a financial cushion to absorb setbacks.
• Time Horizon:
  How long until you need to access your money? A longer investment horizon allows you to ride out market volatility and recover from downturns, making it easier to take on more risk. If your goals are short-term, you may need to prioritize capital preservation and choose less volatile investments.
• Income Stability:
  The nature and reliability of your income influence your risk capacity. Individuals with stable, predictable incomes, such as salaried employees, can generally take on more investment risk than those with variable or uncertain income streams. Households with dual incomes are also more resilient than those relying on a single, larger income.
• Age and Life Stage:
  Younger investors often have time on their side, allowing them to recover from losses and take on more risk. As you approach major life milestones—like retirement, starting a family, or buying a house—your risk appetite may naturally decrease, and your focus may shift toward preserving capital rather than chasing returns.
• Experience and Knowledge:
  Are you familiar with how markets work? Experienced investors are more likely to be comfortable navigating market fluctuations and may be more willing to tolerate risk. In contrast, beginners or those with limited market exposure often prefer safer, more predictable investments and are more likely to be emotionally affected by volatility.
• Emotional Comfort and Risk Tolerance:
  How do you react when markets drop—do you see opportunity, or do you worry? Your psychological response to volatility is crucial. Some investors are naturally more risk-averse and may feel anxious during downturns, while others can remain calm and even view market dips as buying opportunities.
• Past Experience:
  Your previous investment experiences can shape your current risk preferences. For example, someone who has experienced significant losses may be more conservative, while someone with a history of gains may be more willing to take risks.

It’s important to distinguish between your capacity for risk (what your financial situation allows) and your tolerance for risk (what you are emotionally comfortable with). The most effective investment strategy balances both aspects, ensuring your portfolio is both suitable for your situation and sustainable for your peace of mind.