Mirror mirror on the wall who is the savviest investor of them all? Many times, the new investor is looking to place their hard-earned money into an investment with hopes of achieving a stable return. With that mindset, this type of investor tends to be risk averse and will go for a “low risk” investment over one with a higher associated risk. However, it is important to understand that all investments have some element of risk. Risk is a part of life and in finance there is no crystal ball for us to predict the future. Instead of searching for the perfect “risk free” investment, we should determine the level of risk with which we are comfortable and make investments within our comfort zone.
While the potential for returns is greater when you take on greater levels of risk, it is important to know and truly understand your risk profile. A risk profile is an evaluation of an individual’s willingness and ability to take risks. A new investor may find the questions asked by a portfolio manager to be invasive. But having a clear understanding of your risk appetite will allow the portfolio manager to build a portfolio with which you can be comfortable. Simultaneously, you as the investor will better be able to understand what is needed to achieve your expected goals.
Multiple factors will help determine your personal risk tolerance. When assessing your profile be mindful of your goals and time horizons. Generally, a younger person has the gift of time and can recover from a poorly timed or underperforming investment. A more mature investor may want more stable predictable returns and be averse to losses. Your risk appetite can change periodically, and this will determine the risk level of any new investments made and can also affect the previous holdings. A change in your risk appetite may lead to one reassessing the previous holdings and possibly moving out of some or all previous investments and transitioning into investments that meet your current appetite.
As human beings we are all unique. Being armed with knowledge will help us to alleviate emotional investing and allow for making well calculated investment decisions. Knowing your risk profile is an important aspect of selecting from the multitude of options available. As your situation changes, remember to review your risk profile as you may find your attitude to risk has changed. It’s crucial to remember that there is no perfect profile, your risk profile is personal and will align with what you are comfortable with and suits your needs at the time. An advisor who understands your ability and willingness to take risk will assist in determining which products to invest in and the allocation to produce maximum benefit.
Christine Rankine is the Manager -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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