What is a risk profile?

A risk profile is defined as an evaluation of an individual’s willingness and ability to take risks. A risk profile is important for determining a proper investment asset allocation for a portfolio.

Risk profile definition – Investopedia

Risk is not volatility.

Volatility is the extent to which an investment can move – whether positive or negative. Risk is the permanent loss of capital. Your investment time frame becomes vital when addressing risk. Would there be a need to sell even if your investment is showing a loss? This is the risk.

When determining a risk profile, certain questions need to be asked:

  • What is the goal and purpose of a particular investment?
  • What is the time horizon of the investment?
  • Do I need an income from this investment?
  • Would I be forced to realize the investment at a particular time or age, or can this be extended at my discretion?

A primary objective is to protect our capital from the destruction of inflation. Volatility is an unavoidable measure when investing in market linked instruments. Volatility can also be a powerful force for good because the fluctuations work both ways. If you have a recurring premium investment, you will have the benefit of rand cost averaging when each contribution is paid – and a negative market will work in your favour. If you’re confident that your risk profile is correct, market fluctuation is no need to change your investment strategy because a change in markets does not equate to a change in risk. So while it could be stressful, experience shows it is better to stay invested in bumpy times.

Remember, its “time in” the markets and not “timing” the markets.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)