Investing Basics: Risk Profile and Investment Portfolio

Part 4 of 5 of Investing Basics

What is a Risk Profile?

The idea of a risk profiling is to determine how much risk an investor is willing to take. Where investing is concerned,  there will be a certain level of correlation between the amount of risk taken and expected reward. Generally, an investor would wish to receive a higher return to compensate for the additional risk and uncertainty taken. Hence, the objective of the risk profile is to match the investor with a suitable investment portfolio.

What is an Investment Portfolio?

An Investment Portfolio consists of passive and/or active holdings of the different assets classes owned by the investor. Investment portfolio varies from individual to individual based on age, preferences, willingness to risk and investment strategies. An individual risk appetite creates differences in asset classes, regions and industries sectors of an individual investment portfolio.

Find out which of the 3 investment portfolio below best suit your preferences:

The Conservative Risk Profile

A conservative investor mainly seeks stability with an emphasis on regular sources of income. Uncertainty and volatility in the economy frighten this group of investors as he/she would want maximum liquidity and minimal risk on capital. While chasing gains from the financial market is quite unlikely, the investor sleep more comfortably knowing capital at risk is lower.

This risk profile is most suitable for retirees or nearing retirement and wishes to keep pace with inflation. Capital preservation is the main priority.

This profile is suitable for the retired investors with no income from employment. Short to mid-term financial needs are catered for, with 20% in cash and equivalent ready for withdrawal without penalty. A 70% in Fixed Income products such as bonds and bond funds allows for regular payout stream. 10% in stocks allows for a lump sum profit taking when the market is doing well.

The conservative profile works out to approximately 3.5% p.a. potential return on investment.

The Moderate Risk Profile

A moderate investor seeks to balance the best of both worlds with yields from Fixed Income and capital gains from Stocks. The occasional volatility in the economy is of concern but do not have an extreme impact. Funds need not be fully withdrawn to cover for life basic needs when uncertainty strikes.

This risk profile is most suitable for an investor in the late 40’s to those reaching retirement, with a goal to achieve higher capital appreciation. The objective is to build up a portfolio to receive a stream of income in future.

With a regular income stream taken care of from investments in Fixed Income, allocation in Stocks can be used to build up capital appreciation and maximise gains from market cycles. With a diversified portfolio in a range of asset classes, the investor has room to manoeuvre in both up and down markets.

The moderate profile works out to approximately 5.5% p.a. potential return on investment.

The Aggressive Risk profile

As the name implies, the aggressive investor aim to seeks a higher return on his investment with fewer regards to market volatility. It is understood to them that market volatility is a friend and not a foe, as opportunities arise from imbalances in the economy. This group of investor go in when the market is fearful, and take profit when the market is greedy.

This risk profile is most suitable for an investor from the early 20’s to those in their mid 40’.  The aim to maximise potential growth and returns from their investment.

The 10% in Fixed Income and Cash & Equivalent is to take advantage of investment opportunities in a down market. The aggressive investor has income from employment and/ or business and an emergency fund set aside. He is able to ride out down market cycle without using funds from his investment portfolio.

The aggressive profile works out to approximately 7% p.a. potential return on investment.

 

Disclaimer

Note: Long-term returns of the different asset classes are assumed at the following rates of return: Stocks at 8% p.a., Fixed Income at 4% p.a. and Cash & equivalent at 1% p.a.

Actual rates of return may vary according to individual investment holdings.

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