A large part of investment is taking on financial risks. This may seem like a bit much but depending on how you approach investment, you can mitigate your financial risk.
This is why you should perform a risk assessment and profile. It helps to understand your willingness to take risks as well as your ability to lose money or not. Based on this, you will start creating your investment profile and start making your money work for you.
The investment choices that you make should be aligned with your financial risk profile. The risk profile defines how much risk you are willing and able to take and is made up of three main parameters:
Understanding your risk profile is important for medium- to long-term investments. For shorter investment terms you should avoid investments with fluctuating returns that can eat away at your initial investment amount and focus on investments with better returns on investment through compound interest.
Your investment goals might require more risk than you are willing to accept. This means to get more growth you may have to make a riskier investment − and that you’ll need to ensure that your investment approach makes space for both your investment needs and your risk profile.
To gauge your risk profile, you need to understand what kind of risk-taker you are. There are five types of risk takers:
To find out what kind of risk-taker you are, you’ll need to complete a questionnaire that will include questions like the following. The more likely you are to agree with the question posed, the higher your openness to risk for financial gain.
You can use the below as a guide:
|Question||Strongly agree||Agree||Neither agree nor disagree||Strongly disagree||Disagree|
|I’m open to the ups and downs of investments.|
|I’m stressed when it comes to making important financial decisions.|
|It’s important to take on financial risk.|
|I’m more open to bigger investment risk than other people.|
|I’ll accept investment risk even after suffering losses from previous investments.|
|I’m open to short-term loss for long-term gain.|