Risk tolerance is a commonly used expression. Many assume it means that you are either a high risk or low risk investor. And that your rating is related only to returns. But this is not the case.
Retirees and those planning retirement face a bewildering array of investment options. Some options, such as cash deposits, return very little. Others promise much higher returns on your money. The most important thing is to select a mix of investments which will not threaten your physical, mental and financial wellbeing. And this is where risk tolerance comes into play. It’s primarily about financial peace of mind.
It’s important is to consider which of the six risk profiles (see below) best matches your needs.
But first, let’s start with a definition.
Risk tolerance in investing is a measure of how much of a loss someone is willing to accept. Someone with a high risk tolerance would accept the chance of higher losses to pursue better returns. Such tolerance varies from investor to investor, according to financial goals and different investment timeframes.
A better understanding of your risk tolerance can help to ensure that your investments and superannuation are correctly aligned to this profile.
The variables associated with risk tolerance are:
- Your financial experience and literacy (e.g. how much do you know about the stock market, the property market. and exchange traded funds (ETFs)?. Do you have a clear understanding of the many different asset classes?
- Your personal tolerance (how might you react if an investment of $100,000 slipped to $90,00 in a month due to market volatility, for example)
- Your age
- Your capacity to recover from financial loss
- Your financial goals (including timeframes)
- Your health.
The six risk profiles we use are:
- Cash investor – you don’t want to risk losing any of your money through negative returns
- Conservative Investor – short-term security and minimal capital loss is important
- Moderate investor – You want your investments to work towards your medium to long-term saving goals and you seek a balance between risk and return
- Balanced – You want your investments to work towards your medium to long-term savings goals and are comfortable accepting a moderate to high exposure to risk
- Growth investor – You want your investments to work towards your medium to long-term savings goals and are comfortable accepting a high exposure to risk
- High growth investor. You place capital security second to wealth accumulation
At Retirement Essentials, our financial planners encourage all investors to have a clear idea of their own individual risk profile as a starting point for any investment decisions.
But even if you have already ‘sorted’ your retirement income, it’s never too late to learn more about your profile and use it to review investments and then alter as needed.
Creating extra income is a common retirement income goal – but rarely at the expense of the ability to sleep well at night.
Our advisers offer consultations to help you better understand your risk profile and what this means in your investment selection? Why not speak to an adviser?