You’ll never properly understand your appetite for losing money on any assets you buy (~aka your risk-return profile) by simply defining yourself as having either a low, moderate or aggressive attitude to saving.
Even financial advisers tossed out these meaningless ‘personality descriptors’ years ago and refocused on understanding an individual’s savings objectives.
Not sure if you’re a ‘nervous nelly’ or a baby Rambo when it comes to all-things-financial?
The most effective way to find out is by turning the risk-return conundrum on its head by soul-searching your future aspirations.
Most financial advisers now initiate the risk profile conversation by asking what you want to achieve financially, and when you want to get there by.
Bridging the aspiration disconnect
However, if your expectations are out of whack with your capacity to attain them, Wayne Leggett principal of Paramount Financial Services suggests either A) getting a job that pays more, B) taking greater risks with money than you’re initially comfortable with, and/or C) potentially working a lot longer to get there.
“Remember, not everyone has the same aspirations for retirement, and if you’re comfortable being one of the 40%-plus of Australian retirees receiving the age pension, you may not need to make a lot of money or work too hard,” Leggett told Azzet.
However, if like most Australians, you’re hell bent on being a self-funded retiree, your only options are to put more in or make what you have work harder.
Leggett suggests sacrificing some of today's pleasures for a better tomorrow with the first trick.
After all, you either pay now or later in lifestyle.
As for the latter, he says making your money work harder may require putting it to work in a way that you might otherwise be uncomfortable with.
Three key factors
Contrary to popular opinion, risk-aversion is a much more serious issue than people taking a ‘big ballsy’ approach to their money.
When assessing your risk profile, Leggett says there are three key factors in the mix. These include:
A) Timeframe. B) Available financial resources. C) Comfort factor: In other words can you sleep with the decisions you’ve made about your money?
Handling the volatility bogeyman
Where risk profiling comes unstuck, adds Christoph Schnelle, principal with In Your Interest Financial Solutions, is investors' unwillingness to accept volatility is part of the journey.
Schnelle is referring to growth assets like shares and property that go through cycles and rarely go up in a straight line.
Instead of fearing the rollercoaster nature of growth assets, Schnelle recommends looking at them as providing ‘tickets to the game’.
Schnelle reminds investors that their long-term return expectations can go up substantially if they’re ready to accept a higher volatility level.
“Your risk profile is about how much volatility (ups and downs) you can handle and where you’re at in life,” Schnelle told Azzet.
However, what typically stops people from being more ambitious with their financial aspirations, adds Schnelle, is their fear of a bumpy ride along the way.
Low risk - low growth
He also reminds investors that despite volatility, growth assets historically have delivered better outcomes than low-risk, low-growth options like term deposits.
Ultimately, he says the most sensible risk profile is one that strikes the right balance between what your head and heart tell you.
“Putting your money as far to the right-hand end of the scale means you’ll be growing your assets at a faster rate yet still matching your risk tolerance.”
Ironically, Schnelle says super funds which still favour personality descriptors to pigeon-hole you (by default) into a ‘balanced’ portfolio, are invariably more focused on protecting what money you’ve got, rather than growing it.
Kicking your super fund’s tyres
So once you’ve determined your most appropriate risk profile, he suggests finding out if it really aligns with the way your super fund puts your money to work.
If it doesn't, pick a different portfolio or fund.
While super funds have improved, he says they still tend to be far too cautious about older clients' portfolios – even though they have the longevity that they would potentially benefit from future growth cycles.
As a result, they usually end up with large amounts of cash – the asset with the lowest long-term returns.
This is becoming more and more common as a default option for those over 50, even though their super may need to provide for another 30 or 40 years of retirement.
Stay the course
Despite heightened uncertainty following the impact of U.S. President Donald Trump’s trade tariffs on global markets, Schnelle warns investors not to hastily change their asset allocations.
Past performance is no guarantee of future market behaviour.
Schnelle dismisses naysayers who suggest selling everything and hunkering down on the assumption that 100 years of historic market performance are irrelevant.
"Despite the recent volatility, the market has expressed confidence by going up after a spate of major losses,” Schnelle reminds investors.
“Unless you’re taking a different view of the country’s future prosperity, your own financial situation hasn't changed and/or you don’t expect the whole world to run for the exits – why change anything?”
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
