Step 3: Determining Your Risk Profile
Determining your risk profile is a key step in your investment plan. Risk and return can be seen as two sides of the investment coin, and you need to know where you sit on the risk/return spectrum. Rodger will talk this through with you and explain the subtleties involved in this important decision. Before or during your meeting with Rodger you can complete the risk profile questionnaire in the Money Matters Data Form. This asks a series of questions that help to determine your risk profile.
Higher risk and return portfolios have more growth investments (shares and property) and less defensive investments (cash and fixed interest). Defensive investments are generally expected to reduce the overall volatility or ups and downs of the portfolio, but the cost of this is expected to be lower long-term returns.
There are a number of factors to be considered in determining your risk profile. One is the period of time for which you are prepared to invest, which should be matched to your goals. Longer-term goals, such as funding 20 years plus of retirement expenditure, are typically best matched with longer-term investments, including shares.
Another key issue is your emotional comfort level with the ups and downs of the sharemarket. This is sometimes referred to as “the sleep test”. Would you be able to sleep at night if your portfolio experienced a substantial negative return, or even knowing that it could? If not, you may not have the psychological make-up necessary to invest in shares.
Rodger will discuss with you the main asset classes – cash, fixed interest, property and shares – and especially their risk and return characteristics, so that you can move to the next step in deciding upon your asset allocation or to what extent these asset classes will be included within your portfolio.