Calculating your investment risk profile

Calculating Your Investment Risk Profile

For those of you who already invest, you probably have a pretty good idea of what an investment risk portfolio is. For those of you who don’t, this summary is for you. A risk profile is an evaluation of an individual’s willingness and ability to take risks.

When it comes to investment, risk and return are performing a balancing act. The higher the risk, the more return you could potentially see, but also the greater the chance of losing money in a portfolio. Therefore, an individual’s willingness to take risks, or aversion to it, will affect their portfolio strategy.

Deciding how to invest your money is a significant task. Before you even begin to invest you should take the time to work out your risk portfolio. It’s important for determining how to allocate assets within your portfolio to reach your goals.

How is risk evaluated?

Risk is evaluated in lots of different ways. There are many factors affecting the outcome someone might take.

Your financial consultant will run through your attitude to risk when meeting you to discuss your investment options. The process will begin with you being asked a lot of questions about you and your circumstances. Things like:

  • How much would you like to invest?
  • How long would you like to invest for? 
  • What is your appetite for risk? We calculate this using a questionnaire as a starting point.
  • What are your financial goals?
  • What is your capacity for loss?
  • Are there any personal circumstances that need to be taken into account?

Your answers will help to provide you with your risk profile. This will then be used by your financial consultant to shape your investment strategy and asset allocation within your portfolio.

Calculating your level of risk

Let’s take a step back for a moment. You may notice that one of the questions you are likely to be asked is ‘what is your appetite to risk?’ This can be a bit of a tricky question if you haven’t given it some thought. You may not even know where to begin to calculate your attitude to risk! So here we will provide some pointers.

There are a number of factors to take into consideration when calculating your appetite for risk. Here are some questions to ask yourself:

  • How long are you planning to invest for?
    Ultimately, the longer you invest your money for, the better chance you have of seeing good returns. Investment values can raise and fall regularly so investing over a longer period of time generally means you are able to ride out these highs and lows. This reduces the risk of losing capital.

    Planning for five years of investment should be the minimum timeframe to consider.
  • What is your capacity for loss?
    How would you feel if you were to lose some of your capital? More importantly, how much can you afford to lose? It’s a risk you have to be willing to take when investing your money. As we just mentioned, values can go up as well as down, so knowing your capacity for loss is very important.

    You want to make sure that any capital loss won’t compromise your financial security.

  • What are your investment goals?
    There are many reasons why people invest their money. Maybe you’re looking to provide yourself with additional income when you retire, or you simply want to grow your wealth. Knowing what you want to achieve is key.

    Your end goal will affect your investment strategy.

  • Benefits of an emergency fund
    Evaluate what other assets you have that you would be able to fall back on should the markets take a downward turn. It’s generally not wise to take on a high-risk investment if you don’t first have an emergency fund to fall back on. If you have fewer assets, it’s prudent to consider a lower risk investment.

    Make sure you have an asset safety-net before you begin investing. Then, consider a risk profile to reflect these assets.

Investment should not take a one-strategy-fits-all approach. It’s a personal journey which you should feel happy and confident in setting off on.

After asking yourself these questions, you should feel much more confident with knowing what level of risk you are comfortable with taking on. If you’re still a little dubious, discuss your answers with your financial consultant.

Reviewing your risk portfolio

We have written before about why it’s important to regularly review your finances. Reviewing your attitude to risk is no exception. Your level of risk can be pushed up and brought back down if needs be. If you’re feeling a little cautious, start with a lower risk, you can always increase it as you build up your fund and get the hang of the markets.

Investments can be volatile things which you don’t have control over. What you do have control over, however, is your attitude to the risk within the markets. If we experience a particularly turbulent time, you may consider re-evaluating your risk portfolio.

Don’t risk it – get independent financial advice!

If you feel you are ready to take the plunge into the world of investment, get in touch with Face to Face Finance. We would be delighted to get you started on your journey!

Here at Face to Face Finance our approach is based on a combination of leading academic theory and time-tested principles to deliver dependable investment strategies. We adopt a structured and disciplined approach which seeks to manage risk, minimise tax and help you to increase the probability of achieving your financial goals.

If you’re still a little unsure and would simply like to ask some questions we are more than happy to have a chat with you. Call our friendly team or pop into the office.

Do you feel like it’s a good idea to re-assess your risk portfolio? Get in touch with your financial consultant to arrange a review meeting!

Remember: the value of your investment could go down as well as up and you may not back the full amount you invested. Past performance is not an indicator of future performance.

Face to Face Finance (Anglia) Limited is authorised and regulated by the Financial Conduct Authority
Registered in England No. 439288.

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