Risk Tolerance is the level of risk that an investor is comfortable with. Risk tolerance (sometimes called risk aversion) shows how much investment loss an investor will accept. It is crucial to understand your risk tolerance, and a professional assessment can determine this.
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There are three levels of risk tolerance that classifies investors:
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1. Conservative Investor
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2. Moderate Investor
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3. Aggressive Investor
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Risk tolerance of each investor varies depending on the investment time horizon, the investor's individual goals, age, size of investment portfolio, and investor’s behaviour toward the risk.
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According to previous studies on psychological investment, each type of investor’s risk profile will be best fit to one mixture of risk and return portfolio. Portfolios have different assets that affect risk. Each asset class has a set of risk and return profile. Each investor’s risk profile suits a particular portfolio. The graph below shows the relationship between expected return and risk for each type of investor.
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There are different types of asset classes that can be invested:
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Main types of asset classes include:
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– Cash
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– Listed shares
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– Fixed Income Securities (Bonds)
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– Preference shares
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– Property
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Alternative types of asset classes include:
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– Hedge funds
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– Private Equity Funds
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– Infrastructure Funds
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– Commodities, Currencies and Collectibles
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– Derivatives (CFDs, Options)
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Understanding your risk tolerance is crucial since the risk tolerance is directly related to the outcome of the investment. For example, psychologically, one investor with a low-risk tolerance level if invests in a high-risk portfolio will tend to panic and make wrong decisions.
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Contact us for a FREE coaching session if you wish to understand your risk tolerance and the proportion of each asset classes for each risk tolerance level to improve your investment knowledge and outcome.
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Disclaimer: The information provided is general information only. It does not take into account your circumstances. It’s important to consider your particular circumstances before deciding what’s right for you. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.