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Before you dive into the world of investing, there are many things you need to learn. One of them is the investment risk profile that you have. There are several types of investment risk profiles today. It is important to know which type or category your profile belongs to.
In this review, we will discuss the types of investment risk profiles and the influencing factors. Apart from that, there is also a reason why you need to understand it. Check out the review until it’s finished!
Factors Affecting Your Risk Profile
Basically, there are 3 types of investment risk profiles that you need to know, namely:
- Conservative. A suitable portfolio for this type is 70% cash or bonds and 30% for stocks.
- Moderate. This type is advised to choose 40% cash or bonds and 60% for stocks.
- Aggressive. This type can try to divide their funds into 15% cash or bonds and 85% stock.
When you identify the type of risk profile above, there are usually several factors or indicators that can be used. Anything?
1. Time
These factors include age and when you need the money invested for a cause. The younger you are, the more time you have to recover from losses.
Conversely, when you get older, you should avoid high risks. This is because you may find it difficult to recover from losses.
2. Lifestyle
This indicator refers to the amount of money that you “sincerely” allocate for investments related to the risks involved. So when you suffer a loss, it won’t affect your daily life.
3. Knowledge in Investment
Some high risk investments require deep knowledge. Therefore, the more insight and knowledge you have, this can affect the investment risk profile.
4. Personal Convenience
Investment decisions can also be influenced by your nature or tendency to decide something. There are times when you might be more aggressive, but there are times when you need to be careful. This will impact the decisions made.
Why You Must Understand Investment Risk Profile?
Not everyone understands that being aware of your investment risk profile is what really helps you in investing. At least, there are three reasons why you need to understand it.
● Don’t Choose the Wrong Investment
Each risk profile has a different tendency in investing. Without knowing the profile, you may choose the wrong investment instrument.
Finally what?
The funds, energy and time that you spent from the start were wasted because the type of investment doesn’t match the risk profile. Indirectly, an understanding of the risk profile can reduce potential losses due to initial mistakes in choosing.
● Better Portfolio Management
One of the best ways to develop funds in the investment world is portfolio diversification. That is, you don’t invest in just one type of investment. There are also various choices, ranging from stocks, forex, and so on.
When you don’t know about your own risk profile, there is a possibility that the investment you choose has a greater risk. For example, you have a moderate risk profile. However, unknowingly you are actually taking all high-risk investments. Without a counterweight, it is certain that the potential for loss is too large.
What if you already understand the risk profile early on?
This understanding will help you manage your portfolio properly and correctly. So, suppose your risk profile is aggressive, the best option is to run both high and low risk investments.
A low risk investment will be a safe backup when a high risk investment is on the verge of losing. The existence of high and low risk investments will also create a stable portfolio so that losses are not too large.
● Be Aware of the Lurking Risks
Many people are interested in becoming investors. Unfortunately only a few are aware of the risks of investing. Those of you who are carried away by currents or trends may only see investment from the profit potential side.
The lure of big profits or the sweet promises of employees from investment companies can actually plunge you into the brink of loss. Conversely, when you understand each other’s risk profile, you know what steps to take.
In addition, the risk profile will also keep you standing without faltering in carrying out the strategy that was decided from the start. That is, your investment becomes more systematic and structured.
Through the reviews above, I hope you already understand the investment risks and risk profiles of each. Do not be hasty or take the wrong step in making decisions just because you join in. This is because everyone has different characteristics and risk profiles.