Spotlight on investment risk profiles

Many of the financial decisions that you make regarding your personal finances involve a certain level of risk. Importantly, the level of risk that you are comfortable with can be different from the next person.

Given this, when it comes to investing inside and/or outside of superannuation, whether over the short, medium or long-term, one of the first ports of call is determining an appropriate investment risk profile.

A common way to do this can involve:

1. Discussion, and learning, about investment fundamentals, for example,

2. Completion of an investment risk profile questionnaire, which helps to assess and clarify areas of importance, for example:

Please note: As you work your way through an investment risk profile questionnaire, there will invariably be questions that you have yourself. Given this, point 1 does not typically occur in isolation with point 2.

Investment risk profile questionnaire

The questions that are asked in an investment risk profile questionnaire can be quite comprehensive and in some instances daunting to consider (let alone answer), but this is not a bad thing.

It’s important to keep in mind that the more in-depth the investment risk profile questionnaire is, the more likely you are to arrive at an appropriate investment risk profile.

Here is a small selection of some common questions that you may be asked:

Investment fundamentals

1. Which of the following best describes your familiarity with investing and investment matters?

  1. No understanding and/or interest.
  2. Not very familiar at all.
  3. Somewhat familiar.
  4. Very familiar.

Financial situation

2. Which of the following best describes your stage of life?

  1. Single with few financial burdens.
  2. A couple without children.
  3. Young family.
  4. Mature family.
  5. Preparing for retirement.
  6. Retired.

Financial goals and objectives (and, expected investment returns)

3. Which of the following best describes your financial goals and objectives?

  1. To generate income.
  2. To generate income and a small amount of growth.
  3. To generate an equal amount of income and growth.
  4. To generate a small amount of income and to have predominantly growth.
  5. To generate growth with little or no income.

Environmental, Social, Governance (ESG) considerations

4. Would you like to exclude from your portfolio specific industries, sectors, companies, countries or regions linked to things, such as mining, armaments, gambling, tobacco, alcohol or forced labour?

  1. Yes.
  2. No.

Time horizon

5. How long would you invest the majority of your funds before you think you would need access to it? (Assuming you already have plans in place to meet short-term cash flow and/or emergencies).

  1. Less than 3 years.
  2. Within 3 to 5 years.
  3. Within 5 to 7 years.
  4. Within 7 to 10 years.
  5. More than 10 years.

Risk tolerance

6. Which of the following best describes your reaction if a year after you had invested your portfolio, you find that, due to the current financial market conditions, it has decreased in value by 20%?

  1. Panic. Sell all of your investments, and invest the proceeds in cash.
  2. Nervous. Sell a portion of your investments to cut your losses, and invest the proceeds in a less volatile investment.
  3. Patient. Hold the investments and sell nothing, expecting your investments to recover.
  4. Positive. Invest more funds to lower your average investment price.

Once you have completed the investment risk profile questionnaire, the answers that you have provided help to determine an appropriate investment risk profile.

 

Investment risk profiles

In a nutshell, an investment risk profile defines asset allocation – the weightings held within your portfolio with regards to the defensive and growth-orientated asset classes.

Although the details are often not standard across the board, here is a brief overview of some common investment risk profiles (inclusive of their risk/return characteristics):

1. Cash.

  • Asset allocation. 100% defensive assets (i.e. cash).
  • To generate income.
  • Probability of negative return years. 0 years.
  • Time horizon. 0 to 3 years.

2. Moderate.

  • Asset allocation. 50% defensive assets (i.e. cash and fixed interest) and 50% growth-orientated assets (i.e. property and shares).
  • To generate an equal amount of income and growth.
  • Probability of negative return years. 1 in 6 years.
  • Time horizon. 3 to 5 years.

3. Balanced.

  • Asset allocation. 30% defensive assets (i.e. cash and fixed interest) and 70% growth-orientated assets (i.e. property and shares).
  • To generate a small amount of income and to have predominantly growth.
  • Probability of negative return years. 1 in 5.5 years.
  • Time horizon. 5 to 7 years.

4. Growth.

  • Asset allocation. 15% defensive assets (i.e. cash and fixed interest) and 85% growth-orientated assets (i.e. property and shares).
  • To generate growth with little or no income.
  • Probability of negative return years. 1 in 5 years.
  • Time horizon. 7 to 10+ years.

Despite the above, other investment risk profiles can include, for example, 100% growth-orientated assets (property and/or shares), or an individualised asset allocation to meet your specific personal circumstances.

Please note: It’s important to understand that your investment risk profile,

  • May be different from your spouse.
  • May include a weighting towards alternatives.
  • May change over time (e.g. as you approach or reach retirement).
  • May be different across your portfolios (e.g. inside and outside of superannuation).
  • May require periodic rebalancing due to the way that asset returns can alter weightings over time.
  • May involve a trade-off as a result of, for example, a mismatch between the risk required (to achieve your financial goals and objectives within a specified time horizon) and your risk tolerance.

If you have any questions regarding this article, please do not hesitate to contact us.

About Shartru Capital group

The Shartru Capital group is an Australian boutique investment and advisory firm. Shartru Capital is a significant investor in a number of businesses including Shartru Wealth Management.

Shartru Wealth Management is the financial advice and licensee business within the Shartru Capital group.

Whether looking for the right investment strategy; advice on superannuation funds – including DIY #Superannuation or Self-Managed Superannuation; personal insurance or how to get started with your first home loan, age care or estate planning – Shartru Wealth Management can help.

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Shartru Wealth has licensed representation in Sydney, Newcastle, Belmont, Brisbane, Tasmania, Melbourne & surrounds, Perth and the Sunshine Coast. For a full list of Financial Advisers licensed through Shartru Wealth Management please click here

We look forward to welcoming you to Shartru Wealth Management.

Disclaimer: Published by Shartru Wealth Management Pty Ltd. ABN 46 158 536 871 AFSL 422409. The advice is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance

By | 2019-07-04T06:41:18+00:00 July 4th, 2019|blog|0 Comments