Assessing Your Risk Profile

Most brokers and financial advisors will present you with a fairly standard questionnaire about your personal details, your income and expenses, assets and liabilities, and some questions designed to assess your appetite for risk. While the result of such an assessment can be a useful starting point, care should be taken when following the recommendations.

Many of the recommendations have an in built bias toward bonds and money market investments for anyone over 50.

We believe that investors should retain a bias towards growth investments for longer than is the currently accepted conventional wisdom.

If you live to 90, an approach that is too defensive is more likely to land you in trouble (through your asset value and income not keeping up with inflation) than a more growth orientated approach. Our recommended approach should also ensure that the value of your assets should be higher at the time of your retirement.

Note that while we believe that our recommended profile is conceptually sound, you do need to use your own judgement (and possibly the advice of a financial advisor) to assess whether it is appropriate for you.

Have a look at the annual returns of five hypothetical investment plans. Which one would be the most attractive to you? In other words, to what extent are you comfortable with taking greater risk to achieve greater returns?

Should your answer be D or E, our suggested growth bias profile would be suitable for you. Should your answer be A or B, a more conventional growth bias in your portfolio would be more appropriate.