Your risk profile is not permanent; it is a snapshot of what you know right now when it comes to yourself as an investor, and when it comes to your investments.
That’s why it is always important to know if your risk profile has changed. After all, going beyond your comfortable level of risk might lead you to a complicated financial situation. But if your investments are too conservative, you may instead waste opportunities to reach bigger goals.
For example, imagine a product with the potential for high returns. If you subscribe to it, you may be able to grow your money well. But you may also lose some of your money instead, and the chances of that happening are higher than those of your other investments.
The higher the risk of your investment outlets, the higher the potential return. The same thing is true when it comes to your time horizon. So if you go into investments ideal for investors with a long-term time horizon, and end up withdrawing short term, you run the risk of withdrawing at a loss.
Before taking this step, ask yourself how comfortable you are with risking that money. If losing that amount would have a huge impact on your finances, consider an investment that fits a lower risk profile, with a lower potential return, and a short-term time horizon. But if that risk is acceptable for you, then you may have reached the point where your risk profile has changed.
Choosing an investment product that matches your risk profile is such a recommended step that online investment platforms and mutual funds put up several warnings and user confirmations for when you try to go beyond your risk profile. You are required to read and agree to these, and even accomplish an e-Waiver form before subscribing to the investment.
Take That Step
Investing in a product that fits a higher risk profile is a financial milestone. It is a big step, and one that you should not take lightly. Don’t do it unless you have a really compelling reason (for example, your financial goal changed so your portfolio no longer fits – something we’ll talk about in a different article) and you’re willing to take the additional risk.
Of course, your risk profile may have actually changed. To find out, you can always take the test again and see for yourself.
The good thing about recalibrating your risk profile versus your current financial status is that you are sure that your rate of investment is consistent with your rate of income. You safeguard yourself from living beyond your means. So every time you receive a pay raise, your investments can also increase.
Remember that if your risk profile has changed, you’ll need to look at your portfolio and find out if it needs a makeover.
If you are not feeling well, you go to a doctor. If your car needs to be fixed, you go to a mechanic. If you want to start investing the right way, one sure-fire way to minimize risk is to seek professional help. Never be afraid to ask a professional for their opinion before deciding. You can find legitimate, registered/licensed experts who can give you the advice you need to make the right choice.
