All types of investment have some element of risk, but some assets are more likely to fluctuate in value in the short term than others.
Markets can experience significant volatility at times, reflected in frequent and sometimes large changes in portfolio values as we have witnessed in the past few years.
Ask yourself these questions
How sensitive are you to risk and swings in returns over the long term? And which assets in your portfolio have more exposure to market volatility?
To assess your investment risk tolerance, financial advisers take into account your beliefs, your age, stage of life and income available for wealth creation.
The adviser also notes your short-, medium- and long-term financial goals and commitments. A strategy is then designed to help you meet your goals. The strategy includes investments in different types of asset classes.
Asset classes
The following table outlines the asset classes and their relative levels of risk for the amount of return.
| Overall Risk | Asset Class | Level of Capital Value Volatility | Level of Expected Returns |
| Low/Defensive | Cash | Low | Low |
| Fixed Interest Securities | |||
| Property | |||
| Australian Shares | |||
| High/Growth | International Shares | High | High |
The five categories
There are five main risk profile categories into which your risk tolerance may be categorised. The following table outlines these profiles and the approximate blends of the asset classes your funds are then exposed to via certain products.
We start with the lowest investment risk (cash) and move to the highest.
| Risk Profile | Description |
|---|---|
| Cash | Investors require capital value stability and a reliable income. 100% of funds would be invested in cash products. |
| Conservative | Investors require stability of capital value and income returns but would like a higher return than that available in cash. Two thirds of the funds would be invested in fixed interest products and cash. The remainder would be split between domestic and international shares with a small amount in property. |
| Moderate | Investors require stability of capital value but also prefer to see a little capital growth in addition to a stable income return. Half of the funds are invested in cash and fixed interest and the remainder is split between domestic and international shares and slightly larger portion in property. |
| Balanced | Investors want to see a balance between capital growth and capital stability whilst still maintaining a stable income. About a third of the funds are invested in cash and fixed interest and over half in domestic and international shares and the remainder in property. |
| Aggressive | Investors are happy to accept a higher level of volatility in exchange for higher growth and income returns but still expect a return. About two thirds of the funds are invested in domestic and international shares and the remainder is split between property, fixed interest and cash. |
What steps can you take
If you feel that your portfolio includes investments with which you are no longer comfortable, please come and talk to us and we’ll discuss all of the taxation and revaluation implications that any changes may cause.
We can then reconstruct a strategy that is more appropriate for your needs and risk tolerance going forward.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
