Investor Risk Profile: What It Is and How to Determine It
Work in financial markets and investing have always been associated with risks. Every investor should keep in mind that they might not only gain but also lose due to price declines and irreparable losses.
Before beginning to invest, decide for yourself what risks you are ready for on the way to your goal. This article is devoted to the risk profile of an investor and controlling risks and losses.
Risk is the possibility of partially or completely losing your investments. The main task of each investor is to decrease risks and limit possible losses by any acceptable level.
Risk profile, or investment profile is the individual attitude of the investor to possible risks in his work.
An investment profile depends on the personality of the investor, the aims and length of investing. In trading and investing, there are three types of risk profile: conservative, moderate, and aggressive.
This approach suggests that the investor is not ready for big risks and agrees on a minimal profit from ivesting. Their goal is to make a profit that will compensate for inflation and this save their capital.
As a rule, a conservative investor has a calm, balanced character and analytical mind. They take any losses very seriously and avoid unnecessary risks. Their approach to choosing instruments is scrupulous and takes time.
By this approach, the investor assumes certain risks to increase profitability. Current minor losses are considered normal and can be withstood for the sake of better perspectives.
Low profitability does not satisfy the investor, so they look for the ways to improve it, disregarding higher than conservative risks.
Aggressive approach is good for risky people. They are ready to suffer serious controlled losses to get super profits fast.
In other life spheres, such people are also prone to risks and making fast decisions. Such investors have well-trained and developed intuition. Losing a part of their capital is a normal part of work for them and does not influence their future investment projects. The main goal of risky investors is highly risky assets that yield impressive revenue.
- Investor’s psychology
- Experience and expertise
- How long they plan to spend on reaching a certain goal
- Size of investment portfolio
- Money management method
The main goal of determining a risk profile is checking whether a future investor is prone to risks. If they are ready for all sorts of risks having no experience, this might be a real problem. Fast loss of the capital might undermine their future investment process.
There exist special tests for determining investor risk profiles. One should answer the questions based on their emotions and experience. It is vital to be honest because this is the only way to select your best investment strategy.
Which answer mostly describes my investment goals?
- Investments must be safe; my goal is to save my money.
- Investments must bring regular revenue.
- Investments must grow all the time; regular revenue is not necessary.
For how long am I investing?
- For a short term, so that I could withdraw the money and use it for other purposes.
- Up to 5 years.
- Over 4 years.
Which average annual revenue satisfies me?
- Up to 5%.
- Up to 15%.
- Over 20%.
Which phrase most accurately describes your attitude to risk?
- I think that investments must not drop in price.
- A loss of more than 20% of my portfolio means that I am doing something wrong and should change the strategy.
- Losing 25-30% of the portfolio is not alarming because soon I will cover this up with a profit.
How much time am I ready to spend on managing my portfolio?
- As little as possible because I do not want to study investing.
- Once or twice a month.
- I am ready to work with my investments all the time.
If you tend to choose more #1, you are most prone to conservative trading. Choosing more #2 means that you need to diversify your portfolio by adding various assets to it. And if you mostly choose #3, you are ready to risks and aggressive investments.
Making investment decision requires keeping in mind lots of factors. Risk is directly bound to the profitability of your capital: high risks = high profits, low risks = low profits.
You need to determine not only your investment goals and tasks in advance but also the sum of your investments. And then you need to decide on the risks and losses that you are ready for.
Getting a fast and large profit is a dream of all beginner investors, but practice shows that in the first couple of years, it is vital to learn how to not lose excessively, and only then – how to increase your capital.
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