The 5 Main Types of Risk Profiles
Understanding the five risk profiles starts by knowing the concept of risk and reward. No matter what you plan to invest in, you should know that there’s always a chance that you’ll lose money. Investments that generate high returns usually come with a greater risk, while assets that generate low yet stable profits are less prone to failure.
Since investing will exercise your decision-making, your risk profile will come in handy. Knowing how much volatility and losses you’re willing to take will enable you to point out which assets you should allocate your money to. In turn, this will make it easier for you to build a strong investment portfolio that matches your financial capabilities, goals, and needs.
1. Conservative
Conservative investors are highly risk-averse. Since their primary focus is on capital preservation, they prefer stable investments that grow gradually instead of risky assets that generate higher returns.
Investors who fall into this category are usually retired and tend to think of possible losses before purchasing. If you belong to this group, you should consider allocating your money to mutual funds, time deposit accounts, and government securities.
2. Moderately conservative
Moderately conservative investors like to play it safe but are willing to take on a low degree of risk. Their portfolios usually comprise of investment vehicles that guarantee profits, but they dedicate a small portion of their funds to low-volatility assets. Blue-chip stocks and foreign exchange are some great options to consider for those in this category.
3. Balanced
Balanced investors keep a 50/50 approach to investing. Half of their portfolio is dedicated to secure investments, while the remainder goes to riskier assets. If you belong to this group, you should start with safe assets such as VUL insurance before you go for riskier investments.
4. Moderately aggressive
Growing capital is the primary goal of moderately aggressive investors. People in this group are usually established professionals who can withstand short-term losses. Since their focus is on maximizing future profits, their portfolio comprises assets with high volatility. Individuals who characterize themselves with this profile bet on real estate or the stock market.
5. Aggressive
Aggressive investors are financially sound individuals who can withstand significant losses. Their financial capabilities and profit-oriented mentality motivate them to reach for assets that can bring the highest returns. People who belong to this group are known to be active traders and invest in growth stocks.
4 Factors that Determine Your Risk Profile
1. Age
Investment returns can vary greatly depending on your time horizon, so age is a vital element in your risk profile. How much time you have left before retirement will define your time horizon, and this will let you know which assets will work best for your present and future needs. Younger professionals who have the advantage can go on riskier ventures compared to retirees that need to preserve capital.
2. Net worth
How much you’re earning and how much you’ve saved won’t just define the assets you can purchase; they will also indicate the degree of losses you can take. Generally, investors with more disposable income can go for riskier ventures, while those in a tight spot financially should go for guaranteed returns.
3. Lifestyle
Given that investing comes with risks, you should remind yourself that a failed venture will compromise your long-term comfort. This is why your lifestyle preferences and spending habits are vital aspects of your investment strategy. Making your comfort a priority will help you stay grounded and remind you to build a safety net whenever you’re allocating assets.
4. Financial goals
Your financial goals are the most important part of determining your risk profile. The milestones you’ve set will enable you to determine which investment instruments will help you progress or which ones will be counterproductive to your objectives.
Assess Your Risk Profile Before You Invest
Attaining success as an investor isn’t easy, but it’s not an impossible feat. While there’s no perfect approach to investing, being aware of your risk profile and how specific investment instruments fit your needs will enable you to make the right decisions with money. Now that you know your risk tolerance, building a sound investment should be a lot easier.
As you start your investing journey, make sure you have a financial safety net in the form of an emergency fund or better yet, an insurance policy, to make sure you and your loved ones are protected in case of emergencies while you wait for your funds to grow.
The good news is BPI AIA has a wide array of flexible insurance plans that come with an investment component. If you’re looking to get a policy amid this pandemic, you’ll be happy to know that our Bancassurance Sales Executives are still available to assist you. Schedule a virtual appointment to learn more!
