Financial Risk Profiling

The real meaning of financial risk may not be what you think it is!

One input to the Efficient Frontier strategy is to determine the maximum Financial Risk that can be employed.

This process is called Financial “Risk” profiling. It is legally required of every investor, to determine their tolerance of investment volatility. Higher volatility tolerances are expected to generate higher returns, in the long run.

What is the underlying cause of investment volatility?….

Answer: the proportion of growth assets (such as property & shares) to income assets (cash amp;& bonds). As the proportion of growth assets increases, so does volatility. (Volatility is defined mathematically as the standard deviation of the returns).

This downloadable PowerPoint presentation provides some more details about “risk” profiling and the causes of investment volatility. The risk profile allows an appropriate balance to be found between risk and reward.

Some more information about investment risk can be found at the Investment Risk Guide.

Click here to try a basic risk calculator for deciding how to invest your superannuation.

It is natural for people to want high, rather than low, investment returns. Yet high return investments will have high volatility, when the value may drop significantly for short, sometimes long times. If a person is not well prepared for this, stress levels rise dramatically.

When investment values drop suddenly, some people may say they didn’t understand these implications of volatility – that they only wanted low risk investments. This is the classic interplay of greed and fear.

At Archimedes Financial Planning, we assist people to find the right balance between risk and reward at the start of an investment.

We provide educational material (PowerPoint presentations, Excel-based risk profiler) that allows our clients to be in control of the determination of risk, to understand and appreciate the range of possible outcomes before an investment is commenced.