Money Your Budget How to determine the right risk profile for you
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How to determine the right risk profile for you

determining your risk profile
Got appetite for risk? Here are the best questions to ask yourself. Photo: Getty
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You’ll never properly understand your appetite for losing money on any assets you buy (~aka your risk-return profile) by simply labelling yourself as having either a low, moderate or aggressive attitude to saving.

Even financial advisers have abandoned these meaningless ‘personality descriptors’ and refocussed on understanding an individual’s savings objectives, and Wayne Leggett, of Paramount Financial Solutions, encourages you to do the same.

Not sure if you’re a ‘nervous nelly’ or a cool customer when it comes to all-things-financial? To find out, Mr Leggett suggests turning the risk-return conundrum on its head by firstly soul-searching your aspirations for the future.

For starters, he recommends asking yourself what you want to achieve financially, and when you want to get there by. Secondly, Mr Leggett says if your expectations are out of whack with your capacity to attain them, you may have to, A) get a job that pays more, B) take greater risks with money than you’re initially comfortable with, and/or C) potentially work a lot longer to get there.

“Remember, not everyone has the same aspirations for retirement, and if you’re comfortable being one of the 40 per cent-plus of Australian retirees receiving the age pension, you may not need to make a lot of money or work too hard,” says Mr Leggett.

However, if like most Australians, you’d prefer to be a self-funded retiree, your only options are to put more in or make what you have work harder.

In terms of the first, the trick, Mr Leggett suggests, is to sacrifice some pleasures today for a better tomorrow. After all, you either pay now or later in terms of lifestyle.

“As for later, making your money work harder may require putting it to work in a fashion that you might have otherwise been uncomfortable with,” says Mr Leggett.

Contrary to popular opinion, Mr Leggett finds that risk-aversion is a much bigger issue than people taking a ‘big ballsy’ approach to their money.

When it comes to assessing your risk profile, he says there are three key factors in the mix: These include your, A) time-frame, B) available financial resources, and comfort-factor with the decisions you’ve made about your money.

The bit most people get invariably wrong when it comes to long-term savings and risk, adds Christoph Schnelle, principal with In Your Interest Financial Solutions, is their unwillingness to accept that growth assets like shares (and property) go through cycles, and rarely go up in a straight line.

Instead of fearing market volatility, Mr Schnelle recommends looking at it as ‘tickets to the game’, and your long-term return expectations can go up substantially if you are ready to accept a higher level of volatility.

“Your risk profile is about how much volatility (ups and downs) you can handle and where you’re at in life,” says Mr Schnelle.

However, what typically stops people being more ambitious with their financial aspirations, adds Mr Leggett, is their fear of a bumpy ride along the way.

But over the long haul, despite volatility, growth assets have historically delivered better outcomes than low-risk, low-growth options like term deposits.

Ultimately, he says the best risk profile is one that strikes the right balance between what your head and heart tell you.

“Putting your money as far to the right-hand end of the scale means you’ll be growing your assets at a faster rate, yet still matching your risk tolerance.”

Ironically, Mr Schnelle says super funds which still use personality descriptors to pigeon-hole you (by default) into a ‘balanced’ portfolio, are invariably more focussed on protecting what money you’ve got, rather than growing it.

So once you’ve determined your best risk profile, he suggests finding out if it really aligns with the way your super fund puts your money to work; if not, either pick a different portfolio or a different fund.

“Many super funds have found that older clients leave them when they post a loss [for the members],” says Mr Schnelle.

“In response, they put clients into portfolios that are far too cautious, with large amounts of cash – the asset with the lowest long-term returns. This is getting more and more common as a default option for those over 50, even though their super may need to provide for another 30 or 40 years.”

The New Daily is owned by Industry Super Holdings

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