What Is A Risk Profile? And Why You Need One

December 10, 2020

Investing can be an exhilarating process for some - while to others it is scary and fraught with financial danger. The differences in opinion and views on investing help determine a person’s risk profile. But what is a risk profile? And why do you need one? 

Here in this article, we look to answer all those questions so that you can invest with more certainty and comfort. Even if you one of the most relaxed investors out there, you still need a risk profile to help you make the most pertinent investment decisions for you. Read our guide to find out why. 

What Is A Risk Profile?

A risk profile is a summary of a person’s willingness to take on more or less risk. Importantly, it also considers a person’s ability to take on more or less risk. A risk profile will therefore take into consideration how comfortable a person is investing in riskier assets, as well as their ability to lose money without incurring a loss to their standard of living. 

A risk profile will vary according to a person’s circumstances. Those circumstances will include a person’s age, outgoings, incomings, savings and any other responsibilities that have a financial interest. 

Interestingly, some people who have a lot that they could lose without feeling a material impact on their lives, are not comfortable taking on riskier investments. Whereas some investors, who have very little to lose, are far happier taking on a riskier investment that could lose them a significant amount of money. Risk aversion can vary greatly from person to person. 

Why Do I Need A Risk Profile? 

A risk profile is necessary to have if you are allocating a fund manager to manage your assets, but also if you are investing for yourself. They are necessary to minimise any unnecessary risk that you and your portfolio could be exposed to. They also help inform your portfolio's overall construction in terms of prudent asset allocation. In general, the more risk-averse you are, the more bonds your portfolio can or should have - as well as some stocks or other assets that are seen as safer. 

Risk profiles are important at every stage of your life, but it is also important to update them. Your risk profile and your ability to shield risk will change the closer and closer you get to retirement, for example. Or your risk profile may change when you have children and you want to fund a private education. Having a risk profile in place helps protect the funds that you want to have in place for such crucial outgoings. 

Risk Profiles - Key Takeaways

Risk profiles are a vital part to successful investing. They help you achieve your goals as opposed to hamper your ability to invest properly. Ensure that you have one in place before you start creating your own portfolio. Risk profiles are there to protect you and your money. They help safeguard that any money that you rely on later in life is still there after, or throughout, your investment timeline.

Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel now works as a full-time business and financial writer.

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