Managing financial risk: do you know your risk profile?

As you start to roll back your working hours and consider your retirement, you may be seeking investment opportunities. 

Like many approaching retirement, you see investing as a way to generate the cash flow needed to sustain a fulfilling lifestyle and achieve your personal goals. 

But you also know that with current interest rates, it’s hard to generate income from bank deposits.

Everyone understands that with investment comes financial risk – but how do you decide what risk you should take?

Many investors don’t consider their perception or biases when taking investment risk, their capacity and tolerance to handle subsequent losses or volatility in the market, or whether that risk is actually necessary to attain their financial goals.

We call this ‘understanding your risk profile’.

Handling risky investments seems practically effortless when the market is favourable and you’re gaining from financial risk exposures. But suffering a loss can be much more impactful.

Establishing a risk profile with your financial planner will enable you to make informed decisions for your future heading into retirement – financial risks that you’re comfortable with, and that are appropriate to meet your goals.

You have to understand what risk you are comfortable with, what you’re able to take, and what you need to take if you’re to achieve your financial goals.

In order to form a strategy for future investments it’s vital to understand your risk profile. With a clear risk profile, you can review the financial risk required to achieve your financial goals and maintain your lifestyle during retirement. 

Your Risk Profile is made up of the following 4 factors:

1. Risk perception
   
   How risky do you see an investment to be, and what do you think is a significant financial risk? 
   
   What you might perceive to be a large risk could be interpreted differently by someone else, such as your spouse. We always remember the bad experience of a loss, and that influences our future decisions with investments.
   
   If you feel things are too risky, you may be afraid to take on the risk you need to, and conversely, if you think there is little or no risk, you might take on too much risk and get burnt when things turn sour.
   
   
   
2. Risk capacity
   
   Can you take a loss? And how much of a loss can you handle before making a return?
   
   Your ability to manage and recover from a loss may vary depending on your age, amount of surplus capital you have, or how long it is before you need to spend any of the money. 
   
   It’s important to consider the capacity you have to respond to significant market changes.
   
   
   
3. Risk requirements
   
   What do you need to achieve your goals, and are you willing to take a bigger risk in order to reach them? 
   
   After assessing your risk profile alongside your financial plan, you might prefer to reevaluate your goals to be able to favour lower-risk investments. 
   
   
   
4. Risk tolerance
   
   How much volatility can you withstand before getting nervous and bailing out? Is the promise of making a significant return enough to keep you invested through the tough times?
   
   Understanding your tolerance to investment risk allows you to gauge whether you’re comfortable pursuing a volatile investment for larger returns, or a steady investment that is lower-risk with a less significant return.
   
   The biggest danger of taking on more risk than you’re comfortable with is that you may end up cashing up your investments at the worst possible time, thereby locking in a permanent loss and potentially doing irreparable damage to your future financial wellbeing!

Expert guidance will help you to make sound decisions

It’s easy to think a significant investment is required to secure sufficient income for retirement. But this is not always the case! It’s about structuring an investment portfolio in line with your overall risk profile and needs. 

A financial planner will help you assess what your future retirement lifestyle looks like, what your future expenses will be, and whether your financial goals are attainable. 

With expert guidance about your risk profile, you’ll make better informed investment decisions to help make financial security and enjoyment during retirement much more attainable.  

Consulting with your financial planner to determine your risk profile will ensure an informed foundation. From there, you can build an investment plan for retirement that is relevant to you.