What is your investment risk profile?
Risk Profiling does not only address the avoidance of risk but also the ability to take calculated risks and to manage same to achieve zero to minimal losses. It borders largely on knowledge of the types of risk you can be confronted with, the ones you may take voluntarily and the ones that may catch you unawares.
Risk Profile
An investor’s Risk profile is snapshot of their (his/her) appetite towards risks in relation to investment returns. An investor’s understanding of his/her risk profile thus helps in determining the proper investment type to choose and the asset to allocate for a portfolio in order to maximize investment returns or minimize investment losses.
There are three (3) types of investors in relation to risk, i.e., Risk Averse, Risk Neutral and Risk Lovers
- A risk averse investor, when faced with two investments with a similar expected return but different risks, will prefer the one with the lower.
- A risk neutral investor is indifferent to risk when making an investment decision.
- A risk lover is willing to take on higher risk in order to earn higher returns.
Knowing your personal risk profile is thus necessary in determining the portfolio that best suits your investment decision and return expectations.
The scenarios below can guide you to determine your risk profile before you take any investment decision:
| Investment Options | Rate | Duration | Potential Risk Condition |
| Option A | X % | 365 days | You may lose your principal or double your principal at the end of the holding period. |
| Option B | Y % | 365 days | You may lose 50% of your principal or gain a 50% increment of your principal at the end of the holding period. |
| Option C | Z % | 365 days | You are assured of a 30% increment of your principal at the end of the holding period. |
Referencing the above Investment options and their potential risk scenarios, it can be argued that;
If you choose Option A, you are likely to be a RISK LOVER,
If you choose Option B, you are likely to be RISK NEUTRAL and
If you choose Option C, you are likely to be RISK AVERSE.
Having successfully identified your personal risk profile and the potential investment return implications for same; an investor can now be guided by the universe of products/asset classes that fall under each risk category in a portfolio based on the defined risk profile/appetite.
| Risk Averse | Risk Neutral | Risk Lover |
| Fixed Term Deposits | Fixed Term Deposits | Stocks |
| Treasury-Bills | Government Bonds | Mutual funds |
| Government Bonds | Stocks of Blue-Chip Companies | Bonds of companies |
Seek Help:
Contact your Investment / Financial Advisor Today for a review or assessment of your investment risk profile before you close your next investment decision.
You may send comments, questions or suggestions if any to [email protected] and @richmondkwamefrimpong across all social media platforms
