Risk is the possibility of financial loss. Below are some of the most common investment risks: Capital risk – the risk of not getting your initial investment money back.
Currency risk — the risk associated with currency movements against that which your investment is based on.
Inflation risk – the risk that your investment does not keep pace with inflation, reducing its worth overtime.
Volatility risk — the extent and frequency that investments rise and fall.
Risk Profiling and why it matters
Risk profiling helps in identifying one’s attitude towards risk, and their capacity to absorb such risks. Below are some key areas to consider when profiling risks:
1. Review your existing investment portfolio to ascertain the amount of risk already taken.
2. Assess risk attitude by considering a number of common predictors of risk attitude including, risk sensitivity, investment time horizon, desire for profit, financial awareness / literacy, tolerance, investment experience and outlook.
3. Assess your capacity for risk by exploring the impact of possible losses on your wider financial position by assessing your personal circumstances, planned investment time frame and how much you can afford to lose. Note that it is common to have a risk attitude that’s different from the capacity to absorb it.
4. Match your portfolio against your long term goals. Remember, the risk taken has an impact on set goals. You may realise that you need to take lesser risk than you thought or perhaps invest more in order to achieve set goals.
Assessing the above assists in building a deeper insight into one’s requirements and ensures a fair reflection of one’s risk profile and capacity to tolerate possible losses.
This article provided by NewsEdge.