3 Tips: your investment risk profile

While you can manage your investment portfolio yourself, a portfolio manager can take out the guesswork and tailor an investment strategy best fit for you. But it all starts with your Risk Profile – so why is your risk Profile so important? Let’s break it down.

No matter who manages your investments, they’ll all start the relationship with the same “first date” – creating your risk profile. It may seem a bit forward for an almost-stranger to ask you such wide-ranging, in-depth questions about your present (and future) hopes and dreams. There’s method to the madness!

Adrian Saville (a portfolio manager and academic) and I ( Wealthstack ) have a “fireside chat” in this podcast where they meander through their 40 years’ worth of investing experience – focusing on asset allocation and risk profiles. Adrian has been involved in the investment industry since the late 1990s. He currently works for Genera Capital and has a knack for making money matters simple – just our kind of person! We’d encourage you to listen to the full podcast. But for now, we’re extracting their insights and laying out some of the best risk profile advice you can find.

Risk profiling is a conversation that every portfolio manager will have with you to find out key markers that will enable them to build your portfolio unique to you and your needs. So go on the first date, answer all the questions and you’ll end up with a happy relationship with your investments for years to come!

But in all seriousness, your portfolio manager needs to know the following in order to build your personal risk profile.

Key considerations for building your tailor-made risk profile

1. How you’ll behave in stressed (investment) circumstancesRisk profiling allows your portfolio manager to find out how you react and adapt to volatility in the market. When things go well, we are all admittedly happy. But when you start losing ground with your investments, how will you react? Your portfolio manager needs to understand your risk tolerance so that you don’t show up raging in their office on a Monday morning when your stocks have slumped. They need to understand your psychology and mindset around investing and risk and outcomes.
2. What your time horizon looks likeIf you’re in your 20s, the ‘investing to retire’ conversation looks a whole lot different the same conversation in your fifties! Same goes for investment goals related to college education or mortgage down payments.
3. How many people are relying on your investment outcomesYour portfolio manager needs to know who else you’re investing for. If it’s just you, or you and your spouse. Or perhaps other dependents too. All this affects the strategy of your investments.
4. What your investment intentions areAre you asking your portfolio manager to set up a portfolio that will look after you from retirement until death, or beyond that. Legacy intentions play an important role in your risk profile.

The bumps in the road can create panic or celebration, but whatever the volatility, you ultimately want to make sure that you get to your (investment) destination with what you need. Because a wise person once said, “you can’t eat risk in retirement, only returns!”

To avoid the bad taste of risk when you’d rather settle down for a fancy meal of hearty returns, the best thing you can do is understand what goes in to a well thought out strategy.

Our top 3 tips to create your personal risk profile

1. Don’t shy away from the Risk Profile questionsDon’t give your portfolio manager the answers you THINK they want to hear. Answer honestly and with intention so that they can build the right risk profile to best inform your investment portfolio.
2. Remember that different goals have different capacity for risk.For example, you can’t dive headfirst into a volatile investment if your goal is to take that cash out for a mortgage down payment in a couple years – it’ll need time to realise its full, intrinsic value. Rather use that one for your retirement – provided you’re not in your 60s already!
3. Diversification is key!We’ve said it before, and we’ll say it again – diversify your investment options(This article breaks down asset allocation to help you understand investment diversification). But remember this is best done according to your (accurate) risk profile. Then you’ll enjoy that elusive ‘free lunch’ alongside your healthy returns one day!

Your risk profile is as unique as you and your financial goals are. Don’t get stuck on the first date – follow through, build a relationship with your portfolio manager, be honest and real. Track your progress on your Wealthstack Dashboard and watch your financial wellness grow.