Tuesday, 22 January 2013

Financial risk profiles

Before we get too far into the financial planning process, it’s important to discuss the concept of your financial risk profile.  Basically, your risk profile refers to the amount of risk you are willing to bear across your investment portfolio.  Your profile will help you to determine the best asset allocation for your portfolio, as well as the best product selection strategy.  And these will in turn, determine your expected returns.  Generally, lower risk investments deliver lower returns and are less volatile than higher risk investments.

Your risk profile is likely to change over time and can be different across different investment horizons.  For example, someone nearing retirement may have a more conservative risk profile than someone in their 20s.  However, the person in his/her 20s may be saving for a home loan deposit.  In that case, his/her superannuation investment strategy could be quite aggressive, while their growing home deposit remains in a lower risk, lower return cash account.