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:
1. Which of the following best describes your familiarity with investing and investment matters?
2. Which of the following best describes your stage of life?
Financial goals and objectives (and, expected investment returns)
3. Which of the following best describes your financial goals and objectives?
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?
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).
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%?
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
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):
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,
If you have any questions regarding this article, please do not hesitate to contact us.