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Assess risk profile before investing

EACH time you see an adviser, the first thing they mention are the risk levels attached to investments and your ‘risk profile’.

How do you assess your risk profile? The investment boffins at Macquarie Funds Management are recognised as the leaders in the area of explaining and assessing risk.

In their latest assessment of this issue they have come up with a series of questions that investors should ask themselves before making financial commitments of any kind.

The questions are relatively simple and are reproduced below together with the interpretation.

1. Do you expect to leave your investments where they are for the next five to ten years?

2. Is your major investment objective to grow your investment portfolio quickly?

3. Have you ever put money into shares or other volatile investments?

4. Do you decide on your investments quickly before the opportunity is gone?

5. Would you be willing to consider an investment which returned 50 per cent in a good year and -25 per cent in a bad year?

6. Do you like to make all your investment decisions yourself?

7. When considering long-term investing, do you aim to maximise returns, accepting the possibility of short-term declines in the value of your investment?

8. Do you want your investments to significantly outpace inflation?

9. If the value of one of your investments fell by 15 per cent six months after you bought it, would you consider buying more?

10. Does the opportunity of increasing the value of your investments outweigh concern about market fluctuations?

Count how many times you answered ‘yes’ to these questions and choose the risk profile, which fits your answers.

Yes to 1 or 2 questions

Conservative Investor

You typically select investments with little or no risks associated with capital loss such as fixed term deposits.

You are willing to accept other risks to avoid capital loss such as a rate of return that does not keep pace with inflation.

You will have a large proportion of your money in a product like a Cash Management Trust.

Yes to 3 or 4 questions

Moderately Conservative Investor

You are willing to accept a slightly higher risk of capital loss than a conservative investor but you still focus on avoiding potential capital losses and volatility.

Typically, you are most comfortable with investments that normally have less severe and less frequent changes in their value.

Your investments will include products investing in the fixed interest markets.

Yes to 5 or 6 questions

Moderate Investor

You are willing to tolerate more possibilities of suffering capital losses. Typically, you are ‘middle of the road’ with regard to both potential risks and rewards.

You do not mind some fluctuations but will stay away from investments that have more dramatic or frequent changes. You are not as concerned as a more aggressive investor with investment timing and are less willing than a conservative investor to accept risks associated with inflation and reinvestment.

Your portfolio will often have some investments that fluctuate in value, balanced with investments subject to less frequent fluctuation. A large proportion of your portfolio will be invested in balanced funds.

Yes to 7, 8 or 9 questions

Moderately Aggressive Investor

You are willing to tolerate a greater chance of capital loss and will be more comfortable with market fluctuations than a more conservative investor.

You will usually have some investments that are subject to greater fluctuation than those of a more conservative investor. Your portfolio will be made up of a combination of direct investments in shares and property, and investments in specialised funds like Australian Share Trusts.

Yes to all questions

Aggressive Investor

You are willing, and usually eager, to accept a greater chance of capital loss in return for potentially higher returns.

You sometimes focus on short-term market timing as opposed to long-term investing. You are comfortable accepting a high level of risk in the hope of greater opportunity for returns.

Typically, you are less concerned with the rate of inflation and ability to reinvest earnings at the same rate.

Your investment portfolio will typically include Australian shares, investment property, direct investment in a private company and exposure to overseas markets through sector specific products SE Asian Share Trusts or Emerging Markets Share Trusts.

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