We have talked about investments in this blog (PERA, stock market). Something that has come up in these articles are a person’s Investment Risk Profile. Talking about investments, the economy, as well as math would sometimes bring back images of us in the classroom. You know, fighting off sleep as the teacher droned on and on about something that made our nose bleed. You don’t need to worry about falling asleep as I will make this as understandable and as clear as your neighborhood sari-sari store.
What is an Investment Risk Profile?
It just simply means what type of an investor you are. Are you a risk-taker, a conservative preserve-my-capital-by-all-means type, or an everything in moderation type. This will take into consideration what your purpose in investing is. What your risk profile will be would also consider what your investment time frame is. This is because the risks involved would be lessened if spread over a long period of time. Finally, as Stephen Covey said, begin with the end in mind.
What is your Purpose in Investing?
When we invest, we have a goal in mind. Be it saving for a house and lot, a car, a business, or retirement. If you’re looking to withdraw your savings within a year or two, you would be better off saving in more conservative holdings (think of it as a savings account). A more aggressive investment may mean a loss for you in the short term.
Investor Risk Profile – Simplified Pinoy Style
Let’s make it simple and classify it into three profiles; Conservative, Moderate, and Aggressive. I have reduced it into just three instead of the usual six risk tolerance classifications that more sophisticated Financial Planners subscribe to.
In one word, Sigurista. You don’t want to risk your capital, and you’re okay with minimal gains (or tubo in the vernacular). This is as long as you’re sure that you won’t be losing anything. This type of investing is just that little bit better than putting it in an ordinary time deposit.
You’re the type that understands that business has it’s own risk. You know that there are times when your capital will take a dip. But because you have safeguarded your capital, any risk is minimal in exchange for a bit of capital gain.
You’re all in. You understand that if you want to win in business, you need to be in it for the long-haul and through some steep dips. As Chinoys say, lugi dahil maiksi ang pisi. In English, it failed because you did not throw enough money/time at it.
So Which One are You?
To summarize, you can choose to be a conservative, moderate, or an aggressive investor. In reality, you actually don’t need to be just one or the other. In fact, you can choose to be all of those types. You can combine your investments so that one part of your savings, the part that you’re saving as a down payment for that dream house in two years’ time, can be invested conservatively. The other parts of your savings, the one for retirement, you can put in more aggressive holdings. Ultimately, it will be you deciding which investment risk profile best suits your style.
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