Do you live life on the edge? Or are you the type whose idea of living dangerously is limited to throwing your whites and colours into the washing machine together and hoping for the best?
You might wonder what this has to do with financial planning? Well, our question above is an example of how individuals view personal risk differently to the next person. And how we view investment risk is much the same – we are all comfortable with different levels of risk.
Knowing your tolerance for risk means we can develop an investment strategy that is ideal for you. An investment strategy that may help you reach your lifestyle potential and still be able to sleep at night.
So, are you a risk taker?
All good financial planning strategies start with building your risk profile. We combine a questionnaire and discussion which gives us an idea of your comfort around risk and allow us to build an investment risk profile for you. It also allows you to gain an understanding of your risk tolerance which can help to guide your investment choices.
A risk analysis takes into account a number of variables.
Our clients range from those starting out in their working life, through to business owners, and retirees as well. This means we see people at every conceivable place on the timeline of life. And the timeline can have a huge impact on your risk tolerance.
The only way to know your risk profile is to complete a questionnaire but in the meantime here’s a fun take on the different levels of risk.
With a short investment time frame, your portfolio is comprised of mostly cash assets which will provide interest income. You’re not comfortable with market volatility and you’re willing to accept lower returns in an attempt to preserve the capital in your investment.
Life Ethos: You don’t attempt a flatpack build without reading the instructions. Twice.
Sports Fan: Lawn Bowls
Foodie: Chicken Parmigiana
Although you are mainly seeking income returns, you would also like some capital growth from your investment. With a three-year investment time frame, you are looking for low level volatility which comes with an expectation for reduced performance.
Life Ethos: You’re a little bit nervous but you’re willing to dip your toe in the water.
Sports Fan: Tennis
Foodie: You’re happy for the chef to experiment. A little.
With an investment time frame of 5 – 7 years, you have greater acceptance of moderate levels of volatility and risk. Although you’d like to retain your capital, your priority is getting a higher return on your investment. You’re not looking for income through this investment.
Life Ethos: You’re happy to try something new – as long as you dot your i’s and cross your t’s first.
Sports Fan: Show Jumping, Motocross Racing
Foodie: Caviar, Truffles
With an investment time frame of 10 years or more, you primarily invest in growth assets and can tolerate price volatility for the chance of maximum returns. You’re not too concerned about protecting capital.
Life Ethos: Action first. Questions later.
Sports Fan: Sky Diving, Base Jumping, Spectating at a Premier League soccer match
Foodie: Japanese Puffer Fish, Deep-Fried Insects
All investments carry some level of risk. Even cash.
It’s widely accepted that as the risk increases, the potential reward increases as well. And vice versa.
With high risk investments, there is a chance that the investment won’t meet income or growth expectations. This doesn’t mean that the lower risk investment is the one for you. Lower risk investments may not be as susceptible to market volatility, but they do place you at risk of your investment not growing in line with economic factors such as inflation.
Developing investment strategies is a careful balance of understanding risks and rewards and how they fit in with your overall financial and lifestyle goals.
We know our clients value education, and we work with you to help you understand and embrace the financial recommendations we make. You may feel aligned to one or more of these risk profiles, but you might be surprised at the results of a with us.
The financial strategies we set out for you take your financial and lifestyle goals into account as well as your risk profile. Sometimes, your goals and your risk profile don’t match. And this is where education can be vitally important.
There’s no ‘right’ level of risk. But we work hard to find the balance between what you’re comfortable with and what action needs to be taken to help you reach your lifestyle potential.
This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.