Many financial decisions we make regarding our personal finances can involve a certain level of risk.
However, the level of risk that we are willing (tolerance) and able (capacity) to take, can vary from one person to the next.
This is normal, and is often due the differences that exist in our:
1. financial situation, goals and objectives,
2. desire to align our investment values with our personal values,
3. expected investment performance, time horizon, and tolerance/capacity for risk, and
4. understanding of investment fundamentals (risk/return, asset classes, and diversification).
Given this, when it comes to investing, an important initial step is to determine our investment risk profile. This is relevant regardless of our investment structure (super or non-super), or investment time horizon.
Our investment risk profile defines our chosen asset allocation. This is the weightings held within our investment portfolio with respect to the different types of asset classes:
- defensive asset classes, such as cash and fixed interest, and
- growth-orientated asset classes, such as property and shares.
As an example, our investment risk profile may define our chosen asset allocation as being the following:
- 30% of funds allocated to defensive asset classes, and
- 70% of funds allocated to growth-orientated asset classes.
As noted by the names, defensive and growth-orientated, asset classes (and their sub-classes) have their own unique characteristics. This is inclusive of their level of risk/return over the short, medium and long-term.