Knowing your investor profile is one of the first steps to understanding how to meet your financial goals.
Across the investor spectrum, we all have different personality traits, different investment goals and different attitudes to risk.
Investing is about balancing risk and return. Typically the higher the risk, the higher the potential return, or losses. If you’d rather limit your losses and protect your initial investment, you should take less risk.
What is my risk level?
To put yourself in the best position to achieve your goals, you need to understand your personality and what you’re saving for. By understanding the four factors below, you’re more likely to invest in things better-suited to your goals.
Your character: Aspects of your personality will affect your investor profile. Under the umbrella of risk aversion there are hidden traits such as anxiety, confidence in yourself, and preparation for dealing with losses. These traits will affect which investments are best suited to you.
If you’re an anxious person, for example, you should avoid investments with high volatility as you may try and time the market to avoid any big losses.
Timing the market rarely works, however. Research from asset manager JP Morgan shows that missing the 10 best-performing days of the market reduced the return from the US S&P500 index from just shy of 10% to 6.1%.
Your goals and your time horizon: An investment goal can be separated into two fundamental objectives; capital protection and capital growth. Which of the two is more prevalent depends on why you’re investing: retirement, buying a car, or your children’s education.
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The timeline for you to achieve this goal is also crucial, for example retirement in five years versus retirement in 30 years. Whilst you may think riskier strategies are better over shorter time horizons to maximise profits, that’s not actually correct.
The opposite is true; the longer you can invest the larger your scope for returns as your portfolio has longer to try and recover any losses. Statistically, longer-term investments have the potential to perform better.
Your assets: If you keep all your assets in one investment, whether it’s one asset class, one sector, or one company, you’re leaving yourself heavily exposed to risk.
It’s the basic concept of diversification. By spreading your assets between investments, you’re reducing your exposure to risk on the basis that you smooth out any losses with gains made elsewhere.
How do I understand my risk appetite?
Calculating these factors to determine a risk profile may seem complicated, and it’s important to seek advice if you need it.
Traditionally, customers had to go through an interview with their consultant to gauge their investor profile, but at Moneyfarm we provide you with a questionnaire that you’re able to complete from the comfort of your own home.
It helps us frame your risk level and helps protect you from making the wrong choices. If you want to know your risk level, sign up and complete our questionnaire.