Hello my professional friends. Welcome to my fifth article. This time I will share more on wealth management (WM) knowledge. Previously I have shared about time horizon. In this article I will share another fundamental factor when deciding which WM products to invest in. Please give drum rolls to risk profile.
Based on www.investopedia.com, risk profile identifies the acceptable level of risk an individual is prepared and able to accept. It is an evaluation of an individual’s willingness and ability to take risks.
In my opinion, risk profile is the next step you need to assess after you set up your investment goals and time horizon as advised in my previous article. In my 10 years of experience as wealth management banker, I divide the risk profiles into 4 types:
Generally do not want to take risk.
Generally more comfortable with capital preservation and have a preference for stable investments. Not willing to accept much fluctuation in the value of portfolio.
Generally aspired with achieving high income and/or capital appreciation investments. Comfortable with a higher level of risk in order to achieve objective and willing to accept short to mid term fluctuation and potential losses in the value of portfolio.
Generally aspired with maximizing growth potential of assets, willing to accept significant longer term fluctuation and potential losses in the value of portfolio in order to maximize capital appreciation of investments.
Let us jump into several contributing factors to your risk profile. In proper practice these factors can be measured you will be handed out questionnaire with several scenarios. Your choices will summarize your investment risk profile:
1.Age
If you are younger you can take more risk. It is best on general assumption that you can still generate new money from your job or business should your investment fails you.
2.Liquidity reserve
How long can you sustain your daily expense and lifestyle without withdrawing funds from your investment. The longer it is, the more risk you can take.
3.Investment experience
Your familiarity and experience with various investment types and products. The more sophisticated your experience is, the more risk you can take.
4.Investment objective
Your objective in doing investment. Is it to preserve capital, to get higher return than traditional time deposit, or to seek income and growth from your capital? Capital preservation means risk averse profile. Capital growth means risk taking profile.
5.Attitude towards risk
The questions will assess your response in term of time frame and your endurance if your investments experience paper-value loss
The overall points from each question will give the final score of where your risk profile is. If your final score on Risk Averse, you are advised to take any kind of investments and you should stick to traditional banking products like saving and time deposit. However, risk profile is not necessarily always the same. It can change over time due to your experience with the various investments. I will suggest you do periodical assessment for risk profile and your value of portfolio (capital gain/loss) once a year to get a better understanding about yourself towards risk of investments.
Happy investing!
