All investments come with a risk-return trade-off: the higher the potential risk, the higher the potential long-term returns. But while you simply cannot avoid risk with your investments, you can manage it by choosing investments that are suitable for your needs, goals, and risk profile.

So, what’s a risk profile and how can you find yours? Here are some key things to consider.

It’s about time and emotions

There are essentially two components to your risk profile: 

• Your emotions: how you feel about the prospect of wider short-term fluctuations in value, in exchange for higher long-term returns (that’s your risk appetite);
• Your investment horizon: how much volatility your investments can withstand, based on how long until you plan to start using your investments (that’s your risk tolerance). 

Your emotions certainly matter, but they matter a bit less if you have a long investment horizon ahead of you. Generally speaking, if your investment horizon is longer than 10 years, your investments should have plenty of time to bounce back from a downturn. So, you can probably afford to take a relatively higher level of risk. 

The risk of not enough risk

It may sound counterintuitive, but there’s a risk in taking too low a risk with your investments, and that’s missing out on potentially higher long-term growth.

Unfortunately, many people underestimate their risk appetite and tolerance. According to recent research by the Financial Services Council (FSC), three in four Kiwis surveyed would describe themselves as balanced, conservative or defensive investors - despite many of them, including young people, investing for the long term.

Once again, the key thing is to choose a strategy that’s aligned with your needs and goals. There are ways to minimise risk without compromising wealth creation, like asset allocation and diversification. Asset allocation means investing in a mix of different asset classes (e.g., shares, property etc.); then you can minimise risk further by diversifying, for example buying shares across different industries. 

That’s exactly what fund managers do on behalf of investors. So, if you’re investing in a managed fund, it’s crucial that you’re comfortable with their investment strategy. 

So, what’s your risk profile?

If you’re not quite sure what your risk profile is, we can help you find out, so please don’t hesitate to contact us. In the meantime, here are some questions to get you started:

• What are your investment goals?
• What returns would you like to achieve?
• When will you begin making withdrawals from your investments?
• What’s more important to you: protecting your portfolio or getting higher returns?

These are just a few examples and by no means a comprehensive list. But they may prompt you to think about your approach to investment risk with a ‘big picture’ mindset. 

Do you have any questions for us?

If you have any questions, click here to contact us or give us a call on 0800 UK 11 NZ. We’re investment and UK Pension transfers experts. 

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance. Past fund performance is no guarantee of future returns.