Why Risk Profiling is important for investors?
Most investors start with unrealistic expectations about risk and return. Unrealistic expectations can quickly become unfulfilled expectations and unfulfilled expectations tend to cause grief for all concerned. There is often a gap between the level of risk which your client would normally choose to take, their risk tolerance, and the risk associated with the return required to achieve their goals. profiling is a process for finding the optimal level of investment risk for your client by balancing their risk required, risk capacity and their individual risk tolerance. There is often a mismatch between risk required, capacity and tolerance.
- Risk Tolerance is the level of financial risk the client is emotionally comfortable with.
For example, how much a person is willing for their portfolio to diminish for a chance to make bigger returns.
- Risk Required is the risk associated with the return required to achieve the client's goals from the financial resources available.
- Risk Capacity is the level of financial risk the client can afford to take.
It is psychological and critical to know how comfortable an investor is with investment ups and downs, completing the following questionnaire will assist in understanding the risk profiling of the investor and make suitable investments decisions.