As you know InvestSMART is not a financial planner nor do we offer personal specific financial advice. So if you wish to forego personal specific advice and use our discount services it may be interesting to know what we believe is the most important part of the traditional financial planning process in regards to Investment Advice.
In providing Investment Advice the adviser should establish a risk profile for each client and then make recommendations in sympathy with this risk profile.
Your risk profile reflects your perception of the acceptable trade-off between risk and the reward required for bearing any investment risk. If you are willing to accept a high degree of risk, then the high-risk, high-return investment will be viable alternative for any wealth accumulation purposes. In contrast, if you are risk averse you may find that a small decline in the investment may exert high anxiety. If the possibility of such loss would make you loose sleep at night, a conservative low-risk, low-return, safer investment might be better suited for you.
The other factor that affects your risk profile is the investment planning time horizon. As a long-term investor, you can better afford to assume greater risks for better potential returns. Shortfalls from anticipated returns can be made up with additional contributions that are still lesser than the required contributions when investing in lower-return, safer investments. However, as planning horizon shortens, the risk of irrevocable loss from shortfalls increases, and you may be less willing to bear risk and the overall risk profile of the investment mix declines.
Generally speaking there are three or four main risk profiles including:
CONSERVATIVE - an investor who seeks to protect their accumulated wealth and only prepared to accept a relatively low level of risk.
BALANCED - an investor who seeks an investment that provides a mix of income and growth, should be stable in value over a 3-year period, but could fall in value by 5-10% within a year. Over the long term this strategy could provide a return of 6-8%.
GROWTH - an investor who seeks more growth than income with an overall investment portfolio that could provide growth of 8-10% over the long term. The flip side is that in any one year it could fall by as much as 20% in value.
HIGH GROWTH / AGGRESSIVE - an investor who predominantly seeks growth assets that could provide returns of greater than 10% over the long term. The flip side is that in any one year it could fall by greater than 20% in value.
Handing over, what if you need someone else to make decisions for you? There are times in your life when you can't fulfil your financial obligations personally.
