Page 32 - DIY Investor Magazine - Issue 27

INVESTING BASICS:
A SIMPLE GUIDE TO RISK PROFILING
Investors have huge choice and must consider their attitude to risk and how to diversify their investments; risk profiled funds allow investors to match their risk tolerance to their investment goals – writes Christian Leeming.
RISK VERSUS REWARD
Before devising an investment strategy to reach your financial goals, first establish how much risk you are willing to take. This can depend on:
• Your capacity to recover from losses should markets fall
• The length of time you wish to be invested
• Which investment products you invest in or if cash
is more suitable
• Who else relies on your investment goals i.e. family
Some investments are more ‘risky’ or volatile but may offer greater returns over time; the reverse is also true - you could suffer greater losses.
Shares are usually considered more risky than bonds; for the most part, the more risk you take the greater the potential reward, but you should be aware at the outset.
A financial adviser questionnaire or online tool can help to assess your ‘attitude to risk’ and suggest the most appropriate investmentsforyourcircumstancesandneeds.
Typicallycategoriesofriskrangefrom(1)riskaverseto(10) being highly adventurous (below).
Risk profiled funds are independently assessed according to a number of factors including the investments they hold, the team behind them and how they have performed.
Risk profiles are indicative, based on historic data and should not be solely relied upon when making an investment decision. One widely used measurement of the riskiness of an investment is volatility – i.e. how sharply and frequently an investment price moves up or down over a certain period; someone risk averse or with a low risk score, for example, will be matched with an investment with a low expected volatility.
Risk profiled funds fall into two categories; risk rated or risk targeted.
Risk targeted funds are designed to not deviate from specific risk parameters, usually measured by volatility, and to keep the same risk profile. These funds are investor goal driven, which means they can be closely aligned with an individual investor’s financial plan.
Risk rated funds typically have growth or income objectives rather than being investor goal driven; their risk profile is assessed at one point in time and may change.
TOP TIPS:
• Measuringyourattitudetoriskcanhelpyoumatchwith the right investment strategy
• Byusingafinancialadviseroronlinetool,youcan discover your attitude to risk
• Riskprofiledfundshelpmatchtherightfundtoyour attitude to risk
MATCH INVESTMENTS TO YOUR ATTITUDE TO RISK
Risk profiled funds can be matched to an investor’s attitude to risk and there are risk profiled funds on the market to match each category.
DIY Investor Magazine | Mar 2021 32