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Recognizing The Risk Profile and then Determine Investment Strategy

Recognizing the risk profile should be an initial step in developing an investment strategy. It’s just that many people skip this step, so many of them resulting in a failure to invest.

Globally, we see that the market movement is determined by the market risk appetite as a whole. For example, when the condition is optimistic, the market tends to like risk, so that puts more money in stocks or currencies like the euro or sterling. Meanwhile, when the condition of pessimism, then the markets tend to avoid risk, so investors fled to the safe-haven investments such as U.S. dollars or gold.

Meanwhile, the market itself is formed from a collection of individuals who have different risk profiles. This risk profile should determine investment strategy. The absence of recognition of good risk profile is one of the factors that triggered the failure of investing. For example, a person who suffered losses and give up investing in the stock, when in fact he was not ready for the `minus` in the portfolio.

Before determining an investment strategy, an investor should first have to identify the risk profile. Actual risk profile can be divided in many categories, but for this article we just limit it as much as five categories.

Conservative
People are being conservative is not like risk. They were not able to tolerate if they reduced investment. They want stability, thus protecting their portfolios from potential losses. Their focus is generally short term. As a consequence of these conservative attitudes, they are also willing to not get high returns from the market.

Besides perhaps because preferences, conservatives may also be caused by the condition of the investor. For example, because it’s quite tight financial conditions and the investment budget is only a little, so they are not strong if it had to bear the loss. Or do investors have retired, so they rely solely on investment income alone. However, instead of investing here is not risky. Because of the small profit, it is potentially undermined by the inflation or tax.

Appropriate investment options for those who are usually conservative profile more allocations in cash or cash equivalents such as deposits, money market, money market mutual funds and some fixed income instruments, fixed income mutual funds and only a small portion placed on the stock. Composition of about 40-50% in cash and cash equivalents, 40-50% in fixed income instruments, and 10-15% in stocks.

Moderately Conservative
This type of investor with a conservative, because they avoid the losses in the short term, but still trying to obtain higher profits in the long run. Investors are still willing to face some level of volatility or losses in the portfolio.

Typically, these types of investors are those who are retiring or have already retired. In addition, those who ever had a bad experience in investing and also include into this category.

Portfolio investment that suitable for this investors is more in cash & cash equivalents, money market mutual funds and fixed income instruments and fixed income mutual funds, with a considerable number of allocations to stocks. Composition of about 30-40% in cash and cash equivalents, 40-50% in fixed income instruments, and 10-20% in stocks.

Moderate
Investors in this risk profile was willing to accept risk in moderate levels. They want a good return, so they are willing to accept some risk. They want portfolio performance better than the market, but they also do not want portfolio fall when bearish market.

Most of the investors included in this classification. The reason for this variety, there are preparing for retirement, there is a set of education funds, funds to buy a house, and so on.

A suitable investment portfolio is balanced between fixed income instruments and fixed income mutual funds with shares instruments. Portfolio composition including approximately 10% cash / cash equivalents, 40% fixed income instruments, and 50% in the stock instruments.

Aggressive moderately
These investors are willing to accept some substantial risks. Their focus is on improving portfolio performance, so willing to face the high volatility in the portfolio. They want to invest quite aggressively, but also do not want to experience many losses in a short time. This type of investor is willing to wait for profits in the period of time long enough, in order to recover losses that may suffer in the short term.

Investment portfolio that works for people with such profiles are a small number of fixed income instruments, and more allocation to the stock instruments. Portfolio composition including about 5% in cash / cash equivalents, 20% in fixed income instruments, while 75% of the stock instruments.

Aggressive
These investors are well aware that they are exposed to great risk, even more than the market risk. They are focused to obtain the portfolio performance above average, so they also are willing to face the high volatility in the market. They are well aware that investments can generate investment does run out, even up to significant losses.

Usually that have aggressive profiles are those who are young and well established. Here, aggressive investors can allocate a number of investments in derivative instruments such as forex, index, or option.

Portfolio that are suitable for aggressive investors who are allocated much more for stocks, and only slightly on fixed income instruments. The appropriate composition of which is 90-95% in shares or derivative instruments, and the remainder in fixed income instruments.

Speculative
This type of investor is more than aggressive, because they are not only aware of the big risks, but rather `find` risks for potential huge profits. For them, investment is increasing their adrenaline activity. Portfolio suitable for speculative investors are more allocation for derivative instruments, a number of stock and very little in fixed income instruments. The appropriate composition of which is approximately 50% in derivative instruments, 45% of shares, and the remainder in fixed income instruments.

So are the various risk profiles and investment strategies accordingly. Which one you enter the category ? Know and recognizing your risk profile first, then determine the appropriate investment strategy!

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