Risk Profile

What Is It?

A risk profile evaluates an investor’s willingness to take on or accept risk. People of different ages, income and background will have different risk tolerance levels when it comes to their investments at the end of the day.

The risk profile of an employed 25-year old, for example, differs greatly from that of a 60-year old approaching retirement. Accordingly, investment managers attempt to assess each client’s risk propensity ahead of providing investment advice.

Risk is often classified by measures of volatility (the frequency and degree by which an investment’s value fluctuates). Investments which feature greater fluctuation, or movements in prices, along with potential for greater long-term returns, such as stocks, are typically considered to involve greater risk than those which aren’t as subject to such price movements, such as bonds and cash investments.

How Is It Used?

SmartWeath calculates a client’s risk profile through a series of quantitative and behavioral questions to better understand each client and the most relevant solutions to provide. The questions we ask are based on the latest statistical and mathematical insights.

Creating a risk profile for an investor involves determining what amount of volatility the investor finds acceptable and how much risk they are willing to take. An investor who wants to minimize risk, for instance, would reduce their exposure to stocks, which in the past have performed better than investments such as government bonds over the long term, but involve greater market fluctuations. As such, most assets managers construct portfolios that emphasize diversification and include both stocks and bonds.

To take advantage of the ability of stocks to provide attractive returns over the long run, you must be willing to accept the price fluctuations that accompany investments in individual stocks or in ETFs or mutual funds that hold stocks.

SmartWealth utilizes investor risk profiles which entail understanding a client’s risk tolerance, investment goals and investment horizon to better align our investment advice. This lets us know what type of investments you prefer and how we should react on your behalf if changes to your portfolio mix become necessary.

Other Considerations

While a risk profile can help define your attitude towards investment risk, it is not a fixed indicator as to how you will actually react when risk threatens your portfolio. Some investors find that their risk profile changes in response to market changes, and that is why at SmartWealth we assess your reactions to different market conditions through our comprehensive questionnaires, to better align your profile for the long term. That said, SmartWeath monitors your risk profile on an ongoing basis to make sure it fully represents the latest risk tolerance given risk propensity is reliant on constantly changing dynamics in an individual’s personal life.