Your risk profile
Your Risk Profile is the level of risk that will be employed in order to achieve investment returns. Each Risk Profile relates to a specific model, which is the mix of assets that will be used for the investments recommended.
The Risk Profile is the result of a number of factors including:
- The Time Horizon (how long you intend to remain invested),
- The returns you require to meet their objectives,
- Whether you may need to access the money early,
- Your general attitude to risk and, perhaps most importantly,
- Your capacity for risk (whether you can afford to take a certain level of risk without impacting your day-to-day life).
Some of the most important factors are explained in more detail below.
Your Attitude to Risk
Your attitude to Risk is one of the key influences that will determine the eventual Risk Profile. It relates to your tolerance for the volatility and ups and downs that come with investing in risk assets such as stocks and shares. We use a psychometric test developed by FinaMetrica designed to uncover your attitudes and tolerance with respect to investment risk. The output not only tests your attitude to risk but also educates you on what to expect from any given risk profile with respect to volatility and the chance of achieving your goals.
Your Required Risk
This is the level of risk you need to take in order to achieve your aims and objectives. This is determined using historic performance figures to estimate how much risk you need to take in order to achieve the necessary returns.
For example, if you require a lump sum of £100,000 in ten years time and have a portfolio of £50,000 currently, we would work out how much that sum would need to grow by each year in order to achieve the target level; in this case, just over 7% per year. By looking at the past performance of a number of asset classes (through the use of a suitable index) we can determine the Risk Profile you need to take to achieve this level of growth.
Although returns can never be guaranteed and past performance is not an indicator of future returns, it does give us a good idea as to how much risk is required.
Capacity for Loss
This relates to your ability to absorb losses. If you only have £100,000 and are deriving an income from this in order to supplement your day-to-day expenses, it is not sensible to take too much risk with this capital as any significant losses could leave you unable to meet your daily living expenses.
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