When investing it is important that you consider the level of risk you may be taking on as well as the return you would like to achieve from an investment. You may need to consider a trade-off between the risk you are willing to take and the level of return you would like to achieve or would need to meet your needs and objectives.
Risk can mean different things to different people. For example, investment risk could mean:
By working through this section, our aim is to understand more about:
This will help us work out an appropriate level of investment risk for your personal situation, and the type of investments and strategies that correspond to this.
Your investor risk capacity is the extent to which you can withstand the impact of unexpected, negative events, such as a loss of capital or a decline in asset value.
Generally, your investor risk capacity will be influenced by a range of factors, such as:
You will most likely have needs and objectives that have different timeframes. Typically, the shorter the timeframe for an investment, the lower your capacity to take risk.
Put another way, if something negative occurs during a shorter timeframe, the less time your income, savings or investments have to recover.
Common characteristics and details for each timeframe are provided below:
Short term objectives (Investment timeframe – up to 3 years)
Medium term objectives (Investment timeframe – between 3 and 5 years)
Long term objectives (Investment timeframe – longer than 5 years)
Your risk capacity will be one of the things we consider in working out the most appropriate investments and strategies for you.
A very important part of giving you appropriate advice is assessing how willing you are to tolerate changes in asset values in the short term. These changes, known as “volatility”, represent one type of investment risk. Investors take risk because they may need or want to trade-off short-term stability in asset values for the possibility of higher investment returns in the long term.
Your investor risk tolerance has a lot to do with how you feel about these short term changes in value.
Ultimately, your investor risk tolerance is the amount of risk that you are prepared to take and the degree of uncertainty or volatility that you are willing to accept when investing to achieve your financial goals and objectives.
Investor risk appetite can be defined as the amount and type of risk that an individual is willing to take in order to meet their needs and objectives. Individuals will have different risk appetites depending on their needs and objectives. A range of appetites exist for different risks and these may change over time.
By using a combination of cash, defensive and/or growth assets, we can create an investment portfolio that is most appropriate for you. Examples of these assets are listed below.