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Knowing your Investing Personality
Your investing personality determines the type of investor you are and how you should make your investments. Your investing personality is basically your financial risk profile that takes into account various factors like age, financial history, circumstances and your investment goals.
To start with, let us understand what is financial risk and how one’s risk profile is determined.
Definition
Financial risk is simply the possibility that your investment might suffer a loss or fail completely. As a basic rule, the higher risk you take, the higher the potential returns you could receive from your investments.
Your attitude towards financial risk determines your choice of investments. A key question to ask yourself is how you would react with a sudden or unexpected fall in the value of your investments.
Determining your risk tolerance and appetite
Based on your risk profile, you can classify your risk tolerance and appetite as follows:
Low
risk
(conservative)
You are a cautious investor seeking stable investments that will grow steadily in value and do not experience much volatility. High growth is certainly not your priority. The focus is more on moderate returns and on generating a steady income stream.
A bank fixed deposit is an example of a low risk investment.
Medium
risk
(balanced)
You expect good if not very high returns over the long-term. Although your investments may undergo some market fluctuation, you do not want to experience extreme situations. Often, an investment portfolio of a medium risk investor contains slightly riskier but stable investment options combined with a small proportion of riskier ones to generate better returns.
A mix of shares from large and stable companies or units of a balanced mutual fund is an example of a medium risk investment.
High
risk
(aggressive)
You are prepared to expose your investments to a greater level of risk and accept high volatility to maximise returns.
Shares of mid-sized or younger companies or units of equity mutual funds are examples of high-risk investments.
Why is your investing personality important?
You may have different financial goals. They can be short-term goals like saving for an overseas holiday or long-term goals like planning for your retirement. Knowing your investing personality and financial risk appetite will help you pick the right investment to match your goals.
For example, younger investors investing for their retirement can take higher risks and achieve higher potential returns. They have a long-term horizon that positions them better to ride the ups and downs of the market. At the opposite spectrum are investors nearing their retirement who should choose low-risk products to minimise the risk of sudden decline or loss in the value of their investments.
Hence, knowing your investing profile is an important first step towards investing. Investing based on your risk profile can make it possible for you to create an investment portfolio that is most suitable to you.
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TIPS
#1
Determine your risk profile before investing.
#2
Understand the risks involved in different types of investments.
#3
Spread your risk, do not put all your eggs in one basket.
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