Personal Risk Profile

How does your risk profile Impact your property Investment Decisions

Financial Life Stages and Risk Profiles

Financial risk is the variability in financial investment returns that a investor agrees to endure in their financial planning.
In short, a 30-year-old single male with high income and reduced expenditures will likely have a higher risk tolerance than a 70 years of age widower granny who is on a pension. Your risk tolerance is primarily your ‘comfortability’ statistics.

At the end of the day, to earn money spending, you require making long-term decisions that you (and your partner, if suitable) are comfortable with – this is where your risk tolerance needs to be factored in.

To aid you in better comprehending your risk tolerance, we suggest identifying where you go in your financial phase of life, which we have classified right into four significant financial stages:

  • Foundation
  • Growth
  • Preservation
  • Distribution

In addition, every person has a very different Personal Risk Profile:

  • Tolerance
  • Capacity
  • Appetite

The 4-Stages Of Financial Wealth Creation

Working Out at What Stage You Financially

Stages 1 – Foundation: The foundation stage is everything about establishing the foundation for the remainder of your financial life. This phase will undoubtedly occur for most in their twenties-to-thirties and may include points like buying your first home, locating your career, purchasing brand-new cars and trucks, having kids, and more. This stage is everything about structuring income, saving earnings, and investing those earnings.

Stages2 – Growth: The growth stages is generally the longest of the 4-stages, ranging from the late twenties to pre-retirement. In this phase, the goal is to have an outstanding balance of danger and benefit, mortgage repayment, intensifying the gains gradually to attain strong growth on your funding. Typically, this is the stage where people shift their emphasis in the direction of financial goals like investing seriously, paying off their home loan quicker, leaving financial obligations, planning for retired life and so forth.

Stage 3 – Preservation: If you remain in the broad range preservation phase, you’re most likely beginning to pivot your investments into much safer, more predictable possession.  This phase typically occurs for individuals between their 40s- 60s and sets the groundwork for retirement.  In this phase, properties that produce capital may be extra attractive as an ‘earnings substitute’ device.

Stage 4 – Distribution: The final stage of financial life for most individuals is distribution.  This is separate from presents, contributions or kindness along your financial journey and a lot more focused on how you will disperse what you have developed along your journey.  Generally, this stage takes place upon retired life, where you will undoubtedly decide precisely how and what to spend your funds on.  This is a time to chase their life-long dreams or complete their bucket list things.  For others, it might be a time to plan their estate or will certainly and what will undoubtedly be dispersed after they’re gone.  Whatever the instance, the choice is your own, and there are no ‘ideal or wrong’ means on how you choose to spend or spend your cash.

So, since you have clarity on your goals and the numerous stages of life, ideally, you have a far better understanding of what you desire in the future.  By obtaining clarity on what you want, it will become a lot easier to exercise precisely how you can arrive– and which options will undoubtedly be the most effective fit for your objectives, timeframes and risk tolerance.  With that in mind, it’s time to deep-dive right into the many alternatives to buy.

The Three Types of Person Risk Profile

Your Personal Risk-Taking Appetite, Tolerance and Capability

Risk Risk Risk. It’s all the same! Isn’t it?

Can all types of risks be rated the same for an individual? Should they be managed the same way or treated differently?

Risk is a vast subject, covering so many areas, including environment, economy, business, health, Insurance, security, and the list goes on. This article aims to describe the three essential types of personal risk for an individual when deciding on a property investing journey namely.

  1. Tolerance
  2. Capacity
  3. Appetite

By clearly understanding your personal risk profile, it will support you in making the appropriate decision in anything financial.

A key point to remember is that your personality type and risk profile are very different.

KEY POINTS AROUND RISK

  • Risk tolerance is a quantification of financial information on how much loss the investor can withstand without negatively impacting their lifestyle.
  • Risk Tolerance, Risk Capacity and Risk Appetite are very different.
  • Risk Tolerance, Risk Appetite and Risk Capacity need to be viewed concurrently to determine the approach taken for any individual personal portfolio
  • The ability to handle macro and microeconomic changes and personal changes in a personal investment portfolio
  • Stage of life plays an essential factor in risk tolerance.
  • The appetite for risk is a crucial factor in the types of investment undertaken
  • Risk tolerance has many attributes, including financial plans, income, investments, age, and family
  • including financial plans, income, investments, age, and family

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KEY POINTS AROUND RISK

  • Risk tolerance is a quantification of financial information on how much loss the investor can withstand without negatively impacting their lifestyle.
  • Risk Tolerance, Risk Capacity and Risk Appetite are very different.
  • Risk Tolerance, Risk Appetite and Risk Capacity need to be viewed concurrently to determine the approach taken for any individual personal portfolio
  • The ability to handle macro and microeconomic changes and personal changes in a personal investment portfolio
  • Stage of life plays an essential factor in risk tolerance.
  • The appetite for risk is a crucial factor in the types of investment undertaken
  • Risk tolerance has many attributes, including financial plans, income, investments, age, and family
  • including financial plans, income, investments, age, and family

Balancing Risk

Risk is not a bad thing, and it comes with most aspects of life, and managing finances is not different.

Understanding the differences between the three types of risk, appetite, tolerance, and capacity, will provide valuable insight into yourself and empower you to make an informed decision.

It is crucial to consider the individual’s holistic well-being to invest, making it imperative to get the right combination. A too high-risk appetite with a low-risk tolerance and medium risk capacity will not be suitable for you as an investor, and it may cause high anxiety, health problems and mood swings.

Recognising your individual risk profile should be part of any financial planning and investment strategy sessions.

Working with professionals in this area will help you understand how it influences your decision making. Their help will be invaluable to getting the right mix.

Definition of Risk

In basic terms, the risk is the chance of something happening, which is generally associated with something negative. The process aims to identify risks that entail the uncertainty of the effects and implications of a particular action you take.

There are a vast about of information standards on risk and its management. There is an International Standard written, ISO 31000.

What we mean by Risk Tolerance

Individual risk tolerance is the amount of risk that a capitalist is comfortable taking or the degree of uncertainty that a financier is able to manage. Risk tolerance frequently varies with age, income, and financial goals. It can be determined by many techniques, consisting of surveys designed to disclose the level at which a capitalist can spend while still having the ability to sleep at night.

This looks to discover how much volatility a customer is prepared to absorb. Before making any judgment call, it is also essential to consider previous investments’ historical behaviour, such as saving patterns, superannuation contributions, and gambling.

Risk tolerance – The degree of risk-taking appropriate to accomplish a particular objective or manage a risk category.

Risk tolerance is not a function of risk appetite, and risk appetite will influence the approach and impact to risk tolerance position. In determining Risk tolerance, areas that need to be considered are strategy, economics, individuals or reputation.

While risk appetite generally includes qualitative statements, risk tolerance operationalises the declarations by using measurable measures to make better it possible for monitoring and review.
Risk Appetite establishes the tone for risk-taking in primary, whilst tolerance notifies:

  • expectations for reducing, approving as well as going after details sorts of risk
  • boundaries and thresholds of appropriate risk-taking
  • Plans to be taken as a consequence of risk eventuating.

What is Risk Tolerance

Risk Tolerance evaluates our capacity to soak up a loss or the rate of change in financial position if a huge gain or loss was the outcome of an investment due to micro or macroeconomics.

In assessing risk tolerance, we will take into account a range of factors, including:

  • Historical information
  • Time boundaries
  • Financial position and security

What is Risk Capacity

Unlike Risk Tolerance and Risk Appetite, Risk Capacity is the amount of risk the capitalist “must” absorb to reach their financial objectives. The rate of return can be estimated concerning time and earnings to reach these goals. After that, the rate of return information can be utilised to help the investor pick the sorts of investments to participate in and the degree of risk to handle.

To determine the Risk Capacity for any individual, many factors need to take into consideration, namely;

  • Age
  • Education, income (current and future)
  • Financial security
  • Profession
  • Guarantors
  • Personality type
  • to name a few factors.

Risk Capacity needs to assess on a multidimensional aspect. Your Financial Advisor will be able to give you insight into your level.

Revenue and income targets should initially be determined in order to make a decision on the amount of risk that might be required.

Risk Capacity is dependent on the stage of your life, income, financial goals and the type of investment. A person in their 20’s has a higher risk capacity than a person in their 60’s.

For example, for property investment, the returns are measured in 10 years plus. Therefore a person in their 60’s if something goes wrong with the investment, there is virtually no time in their lives to recover from the setback.

Essentially, Risk Capacity is the ability to recover.

When examining your capacity for risk, ask yourself: “Is time on my side? Do I have many years to spend? Or will I need to take money out of my financial investment account soon?” Gradually, markets typically recoup from losses and the number of positive years much exceeds the negative, so your capacity to remain invested throughout down markets is a vital consideration.

When making investment choices, consider your general financial scenario and how well you can hold up against any losses. Suppose you can conserve a lot of your income annually, or you have an extra-wide range readily available to you from other sources. In that case, you can get better weather any type of slump out there as you pursue higher possible returns.

 

What is Risk Appetite

Risk appetite – The quantity of risk an entity wants to accept or maintain to accomplish its purposes. It is a declaration or series of statements that explain the entity’s mindset towards risk-taking. Establishing an entity’s risk appetite happens via the advancement of risk appetite statements that plainly outline what the executive thinks about acceptable risk-taking.

Risk appetite statements are typically lined up into categories of risk, e.g. financial, individual and online reputation dangers. Risk appetite statements will look different to a person’s. Understanding the person’s appetite for risk will ensure the appropriate level of risk management to ensure it is not disregarded or overly managed. This measures your understanding of the principle of risk and how it relates to your life and financial matters.

Risk Profiling

Risk profiling is a process to assist in identifying the optimum levels of investment risk. It intends to identify your personal risk appetite and financial tolerance for your investment decision, and risk Tolerance– describes the level of risk you are taking.

Understanding your Risk Profile

Any Investments come with a risk. And taking risks is not a bad thing, provided you have managed the risk with the care and due diligence required.

This is part of why Strategic Investors have created a methodology to ensure risks are managed and do not impact your life.

The better you know about your risk profile, the better you will be able to minimise or eliminate that risk happening.

The risk we are discussing is

  • How you handle emotionally
  • How you handle it financially

In property investing, we see that their decisions are usually determined by the risk taken against the returns received. Risk is defined as possibly any loss to your portfolio or investment.

What are the benefits of knowing your risk appetite and tolerance?

Undertaking a risk profile assessment, you will learn more about yourself. You will help your financial advisor and yourself make meaningful life and financial decisions.

The key benefits of assessment include;

Your Self Awareness of your Risk Tolerance

You are raising your risk awareness and understanding of your risk profile of tolerance, appetite, and capacity for risk. It will undoubtedly put you in good stead in making any future financial decision and help you avoid costly mistakes. Just knowing about your profile will provide a level of confidence.

Your team will understand your Risk profile

The risk assessment will also provide your financial advisor, accountant, and strategist with insightful and valuable information about how you feel about personal risk. It will provide a clearer view of the relationship between the risk types and how you feel and are capable of managing them. With the information, your property investment team will be able to provide financial advice based on your profile rather than on guesswork or bias. It is intended to remove any negative impact on you emotionally or financially.

Supporting Sustaining, Conscious, And informed risk-taking

By specifying just how much risk the entity wants to approve, you and your consultant can provide educated and informed options concerning handling your finances, increase effectiveness and decrease potential procrastination in decision making. Risk appetite offers the framework and topics to have a robust discussion to determine acceptable risk.

Consistency in Risk Taking and its Mitigation Strategies

Your risk appetite connects broadly just how much risk you are willing to take or desirable. It makes it possible to design mitigation strategies to address when risks are or are about to happen.

Assisting risk decision making as well as grasping opportunities

Having clear Risk Appetite Statements provide the framework for decision making. I keep you and your team the boundaries you are willing to take to support your working property investment management.

Structuring Conversation on Risk Taking

Describing appetite is often very difficult if you have not clearly analysed and nailed down its interpretation. Doing an assessment provides a long way to articulate your risk appetite.

The structured approach to expressing risk appetite promotes this process and motivates practical dispute on what comprises preferable, acceptable and unacceptable risk.

Calibrating Risk Evaluation Criteria Description

Each risk is not always black or white, and there are often many grey shades. The clearer the risk appetite description, the easier it is to create a range of mitigation strategies for the severity level.

The timeliness of responding to a risk occurrence can determine the severity of the financial impact.

Personal Investment Risk Profiles Types

The three tables below provide definitions of the different levels of risk in each category.

Tolerance Risk

 Risk Tolerance Level Description
High Tolerance A highly financial secure person with significant capital and cash available.  Any single or multiple investments will not impact the person’s lifestyle.
Above Average Financially secure, owing home and some other assets, significant savings, high Income, and high disposable Income.  Ability to have guarantors.
Moderate / Average Financial Secure purchased and owned a home for 5-plus years and has some spare cash.  They would typically have a stable, reasonably paying job, and by investing, it would not significantly impact their lifestyle.
Below average Purchased home and pay off the mortgage, with minimum savings with little excess disposable income. 
Low Typically, someone with little assets, little disposable income, and if something goes wrong, could be in dire financial straights. 

Risk Appetite

 

Risk Appetite Level Description
Aggressive A high likelihood to take on a high-risk, high-return investment.  These people tend to have their own businesses and take chances.  They would be happy to go for high-risk high-returns investments.  They tend to be more spontaneous and fast in their decision making.
Above Average

Likes the concept of leveraging money and is willing to take chances.  Will need to have some time to digest and perform some high-level analysis.

Usually, they will not need someone else to make a decision.
Considered

The investor tends to want to be educated in the specific investment format.  They will require some high-level analysis along with a medium level of confidence.

They will seek advice from a financial advisor.
Below Average

Need to be well educated in the investment type and know other people who have made similar investments.

They will require several different investment analyses and some level of guarantee for the investment.
Very Passive

Extremely conservative in investing, prefers banks rather than shares.  They often appear to be pessimistic about any kind of investment, and they seek many guarantees and tend to go for a balanced investment portfolio.

They will typically ask several specialists and friends before committing 

Risk Capacity

Risk Capacity Level Description
High Would have significant time to recover financially from any major investment setback.  Willing to start looking for a new investment to commence recovery. 
Above Average Ability to reasonably recover without any real impact on their lifestyle or future investments 
Average Ability to make a full recovery within a few years, with some degradation of their lifestyle and 
Low A degradation in lifestyle, though, will be able to survive with very limited chances to recover from the negative impact of investment investment 
Very Low No ability to recover from the investment failure.  Would endure financial hardship or even bankruptcy. 

Understanding Risk Profiling Assessment Questionnaires

Risk profiling for any individual is a very complex activity. There are so many variables to consider. Just a simple one, you may be doing the survey late at night after a bad day at work, and you are not in the best of moods, your completion would be tainted due to your mood. On the other hand, if you had just had a good few months on the stock market with all or shared performing well and had big dividends paid out, answering the question could be different.

To become a property investor there is a fair bit of education to undertake.  Strategic Investors are keen to share our knowledge and experiences.  We continupously prepare real estate investing material.  One of latest article “Is property a good investment?  The Pros and Cons of Real estate Investing explored” is worth a read.

The risk profile assessment should be used as a guide only along with other known factors. We have provided a non-exhaustive list of disadvantages and advantages of undergoing this process in the table below.

 

Advantages Disadvantages

        A risk tolerance survey aids in analysing and discovering your levels of risk appetite and tolerance.

While people believe they intuitively know their risk profile, there can be surprising results when undertaking an extensive survey

Asking the appropriate thought-provoking questions can identify risks that may not be initially identified.

The questions should be developed to suit your property investment portfolio with the ideal understanding of property investment professionals and existing tools.

        Although these questions supply initial insight into a customer’s personal and finances, there is a significant drawback to relying solely on them.  The problem is the questions usually are not overly comprehensive to ensure they are not an overburden for the person to complete and the results are interpreted by a consulted.

This technique is sadly insufficient as risk tolerance.  Risk Tolerances require more financial analysis rather than questions

However, it does provide adequate initial screening proper to a detailed analysis.

The major disadvantage of a risk tolerance survey is that its first contract is on a typical collection of terminology about risk tolerance (risk evaluation, risk capacity, risk assumption etc.).
Recommendations cannot be purely made on risk.  Other factors are required

The quality of the risk survey may be poorly designed and not adequately created to provide robust data to use in decision making.

 

Final Say

A detailed, well thought out risk assessment is an essential part of any investment strategy process for your overall well being.  Understanding your risk profile will provide you, your financial advisor and investment strategist with crucial information to provide suitable and aligned recommendations.

There is no guarantee of the outcome or the elimination of risk and its consequences, but exploring your personal risk profile gives you an understanding of your weaknesses and strengths, along with being able to create an appropriate strategy and mitigation plan to increase the probability of success