Desire to take risk
Some investors enjoy the inherent uncertainty of investing and are inclined to take on high-risk investments. More common however is an aversion to the stress that a large fall in an investment’s value can produce.
Financial capacity to take risk
A couple with a new baby and a mortgage will have a considerably different capacity to take risks than a single person just starting out in the workforce.
Your need to take risk
This is tied to your investment time frame. If you are 30 years old and planning 35 years ahead for retirement, you will probably be happy to accept greater risk, as short-term volatility is smoothed out, to achieve your goals. On the other hand, if you are nearing retirement, you’ll probably not want to risk losing your money as there isn’t the luxury of time to recover from losses.
Risk and return
With greater risk, there is the opportunity for greater returns. Different types of investments, or asset classes, have greater risk and the possibility of higher returns. There are four main asset classes:
- Shares (also known as equities).
- Fixed interest.
Each asset class has individual characteristics and carries a different level of risk and return to suit a range of investor types.
While risk is an unavoidable part of investing, there are steps you can take to minimise your exposure to unintended risk through diversification and where possible, making longer-term investments.
What type of investor are you?
Understanding what type of investor you are, and therefore what types of investments are appropriate to you, is all about your personal circumstances and your attitude towards investment risk.
How a financial planner can help you
A financial planner can help you understand your risk profile and build a portfolio of investments that matches your risk profile and your investment objectives.