A crucial step to achieving long term financial security is recognising the importance of (and the relationship between) investment risk and return. In practice, this means implementing an investment strategy which matches your personal objectives and risk profile.
When I am speaking to clients about investing for the first time, they generally fall into two categories:
- The Risk Averse
- The Not So Risk Averse
Normally, within the first two to three years, one category changes their mind and changes to the other. Can you guess which one?
If you replied the risk averse becoming the not so risk averse, you would be right. This usually stems from clients becoming more comfortable with the idea of investing and the fact that taking risk can, when understood and applied properly, have a staggeringly positive effect on your portfolio.
There are many different reasons as to why people invest and no two people will have exactly the same objectives. Risk is a necessary and constant feature of investing – share prices fall, economic and political conditions fluctuate and companies can become insolvent. Therefore, understanding your risk profile is an important consideration before you actually invest.
Your risk profile is the relationship between your investment objective, risk tolerance and capacity for loss. As a result, you should be aware of your ability and willingness to accept risk and what level of risk might be required to meet your investment goals.