Thursday, 20 November 2014

What is my investment risk profile?


The starting point of any investment decision should always be how much risk you are prepared to take with your investment. Generally, the more risk you take, the higher the potential returns become but equally the higher the potential for loss becomes. The attitude to risk can also be adjusted to take into account your long term goals for the investment you intend to make.

Below is a simple 3 minute, 6 question task that can help you determine your attitude to risk, along with sample portfolio suggestions for your risk appetite (we assume you already have cash as part of your portfolio).

Risk Profile Questionnaire, choose one answer and total the scores (in brackets) after the answer you have chosen:

1. WHEN IT COMES TO INVESTING, HOW WOULD YOU DESCRIBE YOURSELF?

a) No understanding / knowledge          (10)
b) Very little understanding / knowledge          (20)
c) About as much understanding / knowledge as the next person         (30)
d) A fair degree of understanding / knowledge         (40)
e) A high level of understanding / knowledge          (50)

2. IF YOUR INVESTMENTS DROPPED IN VALUE BY 20%, HOW WOULD YOU REACT?

a) Sell all of the remaining investments          (10)
b) Sell a proportion of the remaining investments          (20)
c) Hold the investments and do nothing          (30)
d) Buy more of the same investments          (40)

3. WHAT ARE YOUR MAIN SAVING AND INVESTMENT GOALS?

a) Immediate income          (20)
b) Specific goals in 5 – 7 years          (30)
c) Specific goals in 8 – 10 years          (40)
d) Longer term growth, 10+ years          (50)

4. HOW WOULD YOU COMPARE YOURSELF TO OTHERS IN TAKING FINANCIAL RISKS?

a) Much less willing to take risks than average          (10)
b) Slightly less willing to take risks than average          (20)
c) No more or less willing to take risks than the next person          (30)
d) Slightly more willing to take risks than average          (40)
e) Much more willing to take risks than average          (50)

5. WHEN YOU HAVE MADE A SIGNIFICANT FINANCIAL DECISION, HOW DO YOU FEEL?

a) Very concerned          (10)
b) Slightly concerned          (20)
c) A little uneasy          (30)
d) Confident           (40)
e) Very confident          (50)

6. IF YOU HAD TO CHOOSE FROM THE FOLLOWING INVESTMENTS, WHICH WOULD IT BE?

A – never has a negative return and return between 0% to 3%          (10)
B – has a negative return once every 12 years and returns -1% to 7%          (20)
C – has a negative return once every 10 years and returns -2% to 9%          (30)
D – has a negative return once every 8 years and returns -3% to 11%          (40)
E – has a negative return once every 6 years and returns -4% to 13%          (50)
F – has a negative return once every 4 years and returns -5% to 15%          (60)

TOTAL SCORE ___________

THE ANSWERS TO THE QUESTIONS LEAD TO ONE OF 5 PORTFOLIOS

Up to 160 Cautious Portfolio
161 – 180 Moderately Cautious Portfolio
181 – 210 Balanced Portfolio
211 – 250 Moderately Adventurous Portfolio
251 plus Adventurous Portfolio

Guide to Investment Assets used in the sample portfolios below from low - high risk:

DB - Domestic Bonds, same currency as investment currency in same country
HY - High Yield Bonds, these may be international in nature with varying currencies
LCD - Large Cap Domestic Stocks and Shares in same country/currency as investment
LCDEV - Large Cap Stocks from developed markets
LCEM - Large Cap Emerging Market Stocks
P - Property Funds, for the purpose of this exercise we are assuming they are international funds
SCDEV - Small Cap dDeveoped market stocks
SCEM - Small Cap Emerging Market Stocks
C - Commodities
SS - Sector Specialist / Single Country Specific Stocks

1. CAUTIOUS
You prefer investments with little risk to your capital. You prepared to accept potentially lower but more predictable returns.



2. MODERATELY CAUTIOUS
You are prepared to accept a relatively low level of risk on investments over the longer term, in order to achieve potentially higher returns.



3. BALANCED
You are prepared to invest in equity based assets, where the risk is spread across a variety of investments and the fund is managed on your behalf, with the aim of potentially higher returns.



4. MODERATELY ADVENTUROUS
You will accept above average risk for the prospect of high returns. You are not concerned with short term volatility. You would expect the majority of your funds to be invested in equities and may invest in funds within a specific geographical area.



5. ADVENTUROUS
You are happy to invest predominantly in equity based assets, where the risk is spread across a variety of investments (some of which are “specialist” investments) and the fund is managed on your behalf, with the aim of potentially higher returns, accepting the increased risk of a loss on your capital.



Summary

This is not a definitive guide to planning a suitable portfolio for your investments but it should serve as a useful guide. A true financial planner or investment manager will take into account other factors before finalising an investment portfolio for their clients.

As always, should you need any help or advice, please contact me.

Have a great day! Andrew Lumley-Holmes.

1 comment:

  1. I would like to say what an excellent job Andrew has done. We went to him after transferring our £860,000 UK pension into a QROPS and losing over £300,000 on the investments in 18 months. Andrew has re-arranged the trustees and underlying investments to result in a net gain for us and re-built the portfolio removing all the poorly performing investments and poorly advised holdings and replacing it with a solid, cost efficient portfolio suitable for our attitude to risk and objectives. I cannot recommend his service highly enough.

    Mark and Annie, Singapore.

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