One of the most important facets of financial planning is to understand our client’s risk profiles. Put simply, this is your tolerance to market volatility and downturns particularly, or the ‘sleep at night’ factor.
If your portfolio is invested with an asset allocation that does not match your risk profile, you will always be uncomfortable with market movements. The converse is that it is invested in line with your tolerance, and you aren’t concerned with short term volatility.
Typically, your risk tolerance is higher when you are younger, and decreases as you age. Think about the crazy things you might have done when you were 21, compared with the measured approach to your activities when you are 65. We react in exactly the same way with our investment decisions.
At 21, we have time on our side for market volatility and growth to smooth out, but this is not true as we age. This means that we must adjust the way we invest portfolios for clients in later life so that the exposure to growth assets is reduced, and there is an increase to the defensive assets.
Defensive assets are things like bonds, cash and other fixed interest instruments, that provide an income with a relatively level and stable capital value. Growth assets are domestic and international equities, property and infrastructure investments that have the ability to both grow significantly in value, as well as fall in value in times of stock market volatility.
Portfolios need to be constructed with a mix of these two broad categories, based on the client’s risk profile. Growth investors will typically have at least 80% invested in growth assets, whilst a moderately conservative investor might have only 20% in this category. A typical balanced portfolio, is middle of the road, a mix of growth and defensive assets in balance. This type of portfolio suits many people and doesn’t require much in the way of adjustment as we age. It’s perhaps not as exciting as a growth model, but is always a solid performer over the longer term.
At The Investment Collective, we will reassess your risk profile every 3-4 years, or more frequently if you become uncomfortable with market movements. This ensures that your portfolio matches your degree of comfort with markets.
If you would like to discuss the asset allocation in your portfolio, give one of our friendly advisers a call.
Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.