Understanding Risk
All investments carry some level of risk. The key is making sure you make the right decisions based on your individual circumstances, and take into account the level of risk you are willing to take on.
The risk profile you choose reflects your perception of the acceptable trade-off between risk and the reward required for taking on that investment risk.
If you are willing to accept a high degree of risk, then the high-risk, high-return investment may be a viable alternative for wealth accumulation purposes. In contrast, if you are risk-averse you may find that a small decline in the investment may cause undue anxiety. If the possibility of such loss would make you lose sleep at night, a conservative low-risk, low-return, safer investment might be better suited for you.
The other factor that affects your risk profile is the investment planning time horizon. As a long-term investor, you can better afford to assume greater risks for better potential returns. However, as the planning horizon shortens, the risk of loss from shortfalls increases, and you may be less willing to bear risk and the overall risk profile of the investment mix declines.
Choosing the right investment for your risk level
Every investor's risk tolerance is different. In choosing a Fund the factors you should consider in consultation with your financial adviser include:
- Your investment goals
- Your expectations for returns
- The length of time you can hold your investment
- How comfortable you are with fluctuations in the value of your investment.
Investor risk profiles – which fits you?
- Conservative - an investor who seeks to protect their accumulated wealth and is only prepared to accept a relatively low level of risk.
- Balanced - an investor who seeks an investment that provides a mix of income and growth, should be stable in value over a 3-year period, but could fall in value by 5-10% within a year. Over the long term this strategy could provide a return of 6-8%.
- Growth - an investor who seeks more growth than income with an overall investment portfolio that could provide growth of 8-10% over the long term. The flip side is that in any one year it could fall by as much as 20% in value.
- High Growth/Aggressive - an investor who predominantly seeks growth assets that could provide returns of greater than 10% over the long term. The flip side is that in any one year it could fall by greater than 20% in value.
Your financial adviser will be able to help you assess your risk profile based on a full risk assessment looking at your needs and future retirement and investment goals.
