Your Risk Profile
Your investment risk profile helps determine the type of investments that are appropriate for you.
There are four main factors we consider when assessing your investment profile:
Duration – How long you plan to invest for
Returns – Whether you need income, growth, or a mix of both
Liquidity – How easily you may need access to your money
Risk – Your comfort with fluctuations in value and the possibility of loss
12% return, can you really afford it?
There is little point chasing a 12% return if it comes with a real risk of losing some or all of your money.
Many people have more than one investment goal at the same time. You might be saving for an overseas holiday, and saving for your retirement at the same time. You’d have separate investment profiles to match each goal, and the best investments for you will be different in each case.
1. Duration of investments
Duration refers to how long you plan to invest for.
Short term – 1 to 3 years
Medium term – 3 to 7 years
Long term – over 7 years
Money you are saving to go overseas in two years time is a short term investment.
You need to be confident the money will be available when you need it. Money you are putting away for your retirement can be a long term investment. Over a longer period of time you’ll be more interested in capital growth.
It’s common to have different investments of different durations.
2. Investment Returns – Income or growth?
To work out the type of returns that suit you, start by deciding whether income or growth matters more to you.
Do you want to use the investment income as it is earned?
Or do you want to reinvest returns and focus on growing the value of the investment?
If you need short term income from your investment, it’s probably best to put your money where you can guarantee how much money it will earn – such as a bank deposit paying a fixed amount of interest for a set period.
If, on the other hand, you don’t need the income in the short term and you want to grow your lump sum as much as possible, you could consider investments that don’t guarantee the return from year to year, such as shares.
3. Investment Liquidity
Liquidity refers to how easily you can turn an investment into cash without taking a loss.
High liquidity investments mean you can get at your investment anytime, without losing any of your investment. A bank savings account is the classic example of a high liquidity investment.
In a low liquidity investment, it may take time to find a buyer at a price which is acceptable to you. Property is usually a low liquidity investment. Shares in public companies generally have a reasonable liquidity. An interest in a forestry syndicate will probably have low liquidity.
Some investments are illiquid, meaning your money is tied up until a specific date or event, such as retirement. It is important you understand and are comfortable with the risk.
4. Investment Risk
Risk and reward are always linked.
The higher the risk you take, the higher returns you could receive, but the more chance you have of taking a loss.
With a low risk investment, you generally know the return you will receive right up front. A low risk investment would be a bank savings account – you know the return (the interest rate), but compared to riskier investments, like shares, it isn’t great.
Higher returns are only available with higher risk.
Investment risk generally shows up in two ways.
Volatility, where values move up and down over time.
Performance risk, where an investment underperforms or fails altogether. Or, the investment gives you a lower return than you expected or needed.
If you are considering high risk investments, you can balance your risks with other investments in lower risk areas, like short term deposits or cash and bonds.You can generally recognise high risk investments because the potential returns are also sky high (the promise of too-good-to-be-true returns is probably just that, not true.)
Moneyworks NZ Ltd
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E: contact@moneyworks.co.nz
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Licensed Financial Advice Provider - FSP 15281
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