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What is my risk profile and why is it important?

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You might wonder why we ask you to complete a risk profile, or you may hear people talking about their approach to risk. This is because how you invest your money (including your super) should align with your own personal approach to investing. A risk profile takes into account your goals, your investment timeframe, and the level of risk you are comfortable with or can afford to take.

You should review your risk profile regularly as you may find your attitude to risk has changed. You may find that your portfolio is not growing with your expectations so you want to take more chances, or you may find that as you’re approaching retirement you would like to see a more stable investment.

It’s important to remember that there is no right or wrong risk profile, it’s whatever you are comfortable with and suits your needs at the time.

Growth versus Defensive Assets

Before we get into the detail on risk profiles. Let’s talk a little about investment assets. There are generally two groups of assets – Defensive and Growth.

Defensive assets include cash, bonds, and fixed interest (for example government or corporate loans) and are generally considered to provide income rather than generating capital growth. These are considered low risk but will provide a stable return.

Growth assets include both Australian and International shares, property, and infrastructure. These types of assets are generally higher risk, with the potential for higher growth over the long term.

What are the risk profiles?

While there may be slight name changes, most people will use a group similar to the ones listed below.

Conservative risk profile

This type of investor is concerned about preserving their capital (money), they are risk averse and happy with moderate returns. Their investment model would be around 85% defensive assets with 15% growth assets.

Moderately conservative risk profile

The moderately conservative investor is willing to take a little more risk and diversify. To them, risk means uncertainty which they are willing to accept to gain a little growth. This investment model would be around 70% defensive assets and 30% growth assets.

Balanced risk profile

This is the most popular profile and usually the default option for super funds. It is a pretty even mix of defensive and growth assets (around 50% each). This allows for some growth and market volatility while still being protected from big losses with the defensive assets.

Moderate risk profile

A moderate risk profile, similar to a balanced profile, allows for a broad spread of investments. However, there will be a little more focus on growth assets. The portfolio will be made up of around 70% growth and 30% defensive assets.

Growth risk profile

The growth investor is seeking some gains while still having some protection with their defensive assets. They will understand the volatility in the market but be willing to accept this in pursuit of growth over the long term. The portfolio for a growth investor would be around 85% growth, 15% defensive.

Aggressive risk profile

The aggressive investor is all about growth, they’re willing to risk everything for it. They will be 100% invested in growth assets and will ride the market highs and lows in pursuit of growth. This investment option is suitable for those with a long-term investment plan, usually at least seven years or more.

We have our own investment models here at Financial Framework, and we have seen some very pleasing returns on these. If you want to find out more information, click here.

It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever-changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.

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