Risk profile: find out what it is and how to use it to your advantage

This is often the first thing a financial advisor determines, as he or she must know your risk tolerance and goals to recommend useful options.

What is a Risk Profile?

A risk profile is an assessment of a person’s willingness and ability to take risks. It can also refer to the threats an organization is exposed to.

The concept of risk aversion is essential to understanding where and when to invest, and it refers to how much risk a person can take on. Would you rest easy knowing that most of your investments are unsafe? Most people would answer no. Some investors may panic at the very thought of risk. Thus, to truly know their aversion, it is necessary to carry out assessments and questionnaires on a risk profile.

The risk profile questionnaire

A risk profile questionnaire is a tool used by most financial companies to understand their customers and suggest the ideal portfolio.

The questionnaire focuses on defining the objectives and desired return, and then identifying the risk necessary to achieve those gains.

It will also ask questions to identify the individual’s ability and tolerance. In this way, the profile will be defined according to the type of investor that can be conservative, balanced, or moderate, among others.

Discover the most common risk profiles

The six most common risk profiles are adopted by most financial companies:

1. Conservative investors

These types of investors are primarily focused on preserving capital and are more defensive of their money, so they are more likely to accept lower interest rates, provided they are combined with low risk. As such, most assets earn interest and less is earmarked for growth.

Fixed interest is great for this profile. In this category fall people with short-term goals, such as buying a house or a car, that would make them check most of their money in about two years.

2. Moderately conservative investors

This category includes investors with a term of three years or more. Fixed interest is also important in this profile. This type of investor has a greater acceptance of growth assets and about 70% of their investments are still dedicated to interest.

3. Balanced investors

In this category is the investor who has found a certain balance between his aggressive and defensive side and has begun to accept greater investment volatility, with potential returns. There is still, however, a hedge of money, leading to a situation of 50% asset growth and 50% traditional income assets.

4. Growth investors

This profile is for investors with a minimum term of seven years. They may have less stability as they can keep their money working longer, yet they still want some income assets to keep them afloat.

5. Aggressive investors

In this category are those able to better withstand market volatility, as they usually have a higher income or more starting money. It has a longer term, with a minimum of nine years for returns. As a result, these investors typically keep 85% of their cash in growth investments and only 15% saved in income assets.

6. Very aggressive investors

For this type of investor, the risk is not an issue. That way, they keep everything invested in growth assets and don’t worry too much about capital stability, just maximizing returns.