Risk Profile

Your risk profile reflects your perception of the acceptable trade-off between risk and the reward required for bearing any investment risk. If you are willing to accept a high degree of risk, then the high-risk, high-return investment will be viable alternative for any wealth accumulation purposes. In contrast, if you are risk averse you may find that a small decline in the investment may exert high anxiety. If the possibility of such loss would make you loose sleep at night, a conservative low-risk, low-return, safer investment might be better suited for you.

The other factor that affects your risk profile is the investment planning time horizon. As a long-term investor, you can better afford to assume greater risks for better potential returns. Shortfalls from anticipated returns can be made up with additional contributions that are still lesser than the required contributions when investing in lower-return, safer investments. However, as planning horizon shortens, the risk of irrevocable loss from shortfalls increases, and you may be less willing to bear risk and the overall risk profile of the investment mix declines.

Fundzcorp Analysis of your Risk Profile

The FinaMetrica risk profiling system measure risk tolerance on a scale of 0 to 100. Scores are Normally distributed with a Mean of 50 and a Standard Deviation of 10.

To make the scores and reports more meaningful, the scale has been divided into seven segments. The middle segment is the Mean ± half a Standard Deviation, i.e. from 45 to 54. Segments either side are then a Standard Deviation higher or lower, with the end segments covering the balance of the high and low ‘tails’ of the distribution.

Seven segments are needed to provide sufficient differentiation between people at different points on the scale, particularly for those with extremely low or extremely high risk tolerance. Each of the segments is referred to as a Risk Group.

The Risk Group descriptions have been developed by analysing how those whose scores fall into a particular group typically answer the questionnaire. Fifteen of the twenty five questions have been considered in the analysis. These were selected on the basis of their utility in providing a general understanding of the Risk Groups.

The five main risk groups are summarised as follows:

  1. DEFENSIVE – As a defensive investor you have a high concern for security, but are prepared to accept a small amount of investment risk to gain a reasonable medium term return. The strategic priority is preservation of capital over the medium and long terms.
  2. MODERATELY DEFENSIVE – As a moderately defensive investor you seek an income, together with a capital growth component, to protect your investments from inflation and tax. You do not see the need to take high levels of risk, however short term fluctuation is acceptable. The strategic priority is a balance between medium and longer-term capital growth, and current income to smooth overall returns
  3. BALANCED – An investor who seeks an investment that provides a mix of income and growth, should be stable in value over a 3-year period, but could fall in value by 5-10% within a year. Over the long term this strategy could provide a return of 6-8%.
  4. GROWTH – As a growth investor you seek to maximise long term capital growth, although you do not make unbalanced investment decisions. You tend to waive short-term safety in order to maximise long-term (over 5 years) capital growth.
  5. HIGH GROWTH – As a high growth investor you aim to maximise long term capital growth. You can sacrifice short-term safety in pursuit of the highest long-term (over 5 years) capital growth.

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