Risk Management: How do I choose my risk level

When it comes to managing your finances, one size certainly does not fit all. At The Wealth Designers, we believe that every individual’s financial plan should be as unique as their fingerprint. The philosophy extends to how we approach risk management – taking the time to understand you, your goals, and your comfort level with financial risk, to craft a plan that is truly yours.

What does risk mean for me?

Risk sounds like a negative word, but in investing, risk is an opportunity.  In fact, the level of risk you take will be the main driver of your investment returns.

So, for example, if you are prepared to take a  high level of risk and invest aggressively,  your funds will predominantly be invested into Growth assets such as Equities, Property & Alternatives. These assets are going to be more volatile in the short term both upwards and downwards. If you are invested aggressively, when the market is up you are going to benefit significantly from this, however when the market sells off, you will feel this hard in terms of your returns.

But if you choose to take less risk and invest conservatively,your portfolio will be balanced with less exposure to Growth assets and more exposure to Defensive assets such as Cash and Fixed Income. As a result, the highs will not be as high however the lows won’t be as low with less potential for assets to  lose their value in the short term.

Of course, there is the option of going for the middle ground, choosing a profile that will let you fall somewhere in between these two extremes. It’s worth bearing in mind that returns average out over time, so it’s in the short term that the big differences between investment strategies are more apparent. 

Your ideal risk profile will depend on the time frame you have to invest, your liquidity requirements (how much you plan to draw) and also how much volatility you are able to accept. Investing requires sticking power, especially when markets drop, and the value of your well-diversified investments decreases.  Remember that you haven’t actually lost money until you sell, and history has shown us that markets recover over time. A well-constructed portfolio is designed so its combined assets are more powerful together than its individual parts. 

How Do You Choose Your Risk Level?

Getting the risk level right is the Holy Grail of investment.   Questions like how much risk are you willing to take? How much can you afford to take? And how much risk is actually necessary to achieve your financial goals? These are fundamentals that require careful consideration and expertise.

At The Wealth Designers, we use sophisticated risk profiling tools to answer these questions. Our tools are designed to assess your emotional comfort with taking financial risks, which is crucial in determining the optimal level of investment risk for you. This approach considers three critical factors:

Risk required: The level of risk needed to achieve your desired returns.
Risk capacity: Your financial ability to withstand potential losses
Risk tolerance: Your personal comfort level with potential market fluctuations.

By balancing these factors, we help you find a risk level that feels right, both financially and emotionally.

Example forecast: Comparing aggressive vs balanced vs conservative investment funds*

Transparent Reporting

Understanding your risk profile is just the beginning. 

Our advisers will sit down with you to discuss the details in plain English, ensuring you fully grasp the implications of your risk and return expectations. 

We base our insights on a comprehensive risk tolerance database, backed by over 40 years of historical portfolio performance data. This allows us to provide you with representative sample portfolios, showing how they would have performed in the past, and aligning them with your risk and return expectations.

A Partnership In Planning

Choosing the right risk profile isn’t a decision you have to make alone. Our advisers work closely with you to discuss your current financial situation, needs, and objectives. This collaborative approach ensures that the risk profile we agree upon is not only suitable for your circumstances but also aligns with your long-term goals.

Read about our in-house investor team, TWD Invest, who play a huge role in the process of the risk level of your portfolio. This senior team is composed of in-house investment analysts and external consultants with a sole job of watching the market. They work closely with our advisers, keeping them abreast of smart investment opportunities.

At The Wealth Designers, we’re committed to more than just managing your wealth. We’re here to help you understand your financial journey, make informed decisions, and feel confident in the path you’re on. Because when it comes to your financial future, it’s not about fitting into a pre-made mould – it’s about crafting a plan that’s uniquely yours.

Read more about our in-house investment team TWD Invest: https://twd.com.au/our-in-house-investor-team/