When making decisions about investing, it is important to have an understanding of how comfortable you are with the concept of risk and return.
Each and every type of investment has some kind of risk, even money in a bank account or term deposit. Understanding those risks helps you to make decisions about how your superannuation or other money should be invested.
The amount of risk an investor is willing to accept is known as their ‘risk profile’.
The most common five main risk profiles are as follows:
- High Growth
High Growth investors are aggressive investors who want to make more money, and they want to do it in style. They tend to take extravagant risks. High Growth investors don’t mind losing money because there’s more where that came from or they already have substantial funds in reserve. They tend to invest in more volatile small-cap companies and some mid-caps because of the potentially higher payout if things go exceptionally well. On the other hand, they also stand to lose quite a bit if their investments go poorly.
Growth investors are moderately aggressive risk-takers who are long-term investors and can patiently wait for their stocks to increase in value. Although this kind of investor may lose more than average when the market is down, growth also tend to gain more when the market swings back up.
Like almost everything else in life, the majority of investors fall in this category, right in the middle. These investors lose less when the market goes down and gain a little more than average when the market goes up. They prefer a balanced portfolio and are usually investing for retirement.
Moderate investors are generally a little older and are already retired or preparing for impending retirement. They might also have experienced large losses in the past. They want to take more risks than defensive investors do, but they also want to protect themselves from losses during downside fluctuations in the market.
Unlike more aggressive investors who are willing to take risks to earn quick returns, most defensive investors are conservative and only want to hang on to what they have. Many defensive investors can no longer work and are unwilling to risk losing any of the income they have left. Most of the time, investors who cannot tolerate any risk whatsoever are better off leaving their money in a bank account.
When it comes to deciding what to invest in, it all comes down to getting the right mix of assets. This varies from person to person and will usually be determined by your risk profile, your goals and personal circumstances.
For more information on which investor you are and how we can conduct your risk profile, please contact us today.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.