A guide to understanding how your risk profile influences your investment choices
When thinking about investments, what is important to you? What’s your risk appetite? Basically, are you willing to go for high returns? Is your mantra: the greater the risk, the greater the potential return? Your first inclination may be to say ‘yes, but is that true?
Understanding your risk appetite will guide your future investment decisions and will help you answer some of the following questions - what are your capital needs? How long are you willing to invest for? How much money are you willing to lose? Before diving in, it is important that you view investments from a strategic vantage point with clearly defined financial goals.
The stock market will always move, and due to these fluctuations, your returns aren’t always guaranteed. Instead, your returns may depend on how much your investments are worth when you sell them. However, as your returns aren’t dependent on a fixed interest rate like they would be in a savings account, there’s also a chance you could end up with higher returns.
So, what does risk really mean?
Investment risk is a personal choice. Therefore, investment advisors often warn against the ‘herd mentality, where people invest in a product without fully understanding them. Pyramid schemes are perfect examples, with victims often saying they invested in them because ‘someone told them to’.
The M36 App is one of those innovative platforms that allow you to understand your risk appetite and provides an insight into the products that are aligned to your risk profile. This will help mitigate that sense of panic you feel when the market is volatile and the value of your investment changes. Market volatility is simply a measure of how much the value of your investments will fluctuate over a period of time.
If you decide to trade in markets of high volatility where you take on more risk over a short period, if the markets rise, you’re likely to have higher gains. On the other hand, if the markets fall, you can expect larger losses. In other words, taking short-term risks will make your investment more volatile. If you prefer to take on lower levels of risk, your investments will gain or lose less as the markets rise or fall respectively.
How do you manage risk?
Through asset allocation, you manage your risk by investing in more than one product thus ensuring you’re not putting all your eggs in the proverbial basket. Spreading your risk is always safer so when the value of one product fluctuates, the value of your entire portfolio is not affected.
By investing in stocks (i.e. equities) or bonds (i.e. fixed income), you will be taking a long-term view and can sit back in some level of comfort. Stocks or shares in companies have historically generated greater returns over the long term compared with bonds. However, stocks are the main contributor of higher market fluctuations. Fixed income securities provide a steady but lower source of interest income but experience much smaller fluctuations.
What does this mean? Having more equities in your investment portfolio will lead to higher risk but has the potential for better long-term growth. Having more bonds will provide more short-term stability but reduces the potential of your potential to achieve long-term growth.
How can M36 help?
With M36, investing is easy as we give you the ability to make informed investment decisions. We assess how much risk your investments should be subjected to by using a combination of your objectives, time horizon, net worth, investment knowledge, your past investment experience and, most importantly, the level of risk you are willing to take. If you are risk-averse, you will typically be advised to invest in low-risk investments such as bonds. If you consider yourself a risk-taker, your investment strategy will be more focused on growth and contain a higher percentage of high-risk investments such as equities. Then again, your risk appetite maybe somewhere in the middle, your investment plan will be more robust and diverse this means your portfolio growth might not be significant.
Once you have discovered your risk appetite, sit back and let M36 do the hard work.
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Important information: The value of your investments can go down as well as up. If you're not sure which investments are right for you, please request advice, for example from the M36 financial advisers.
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Source: Legit.ng
