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What is a risk profile What is investment risk

What is a risk profile What is investment risk


Investment risk is the probability that the value of securities will fall or the return on investment will not meet your expectations. Why risk at all?
Risk is related to profitability. The higher the potential yield, the higher the risk.

You can buy OFZ and receive a fixed coupon income of about 7%, which is guaranteed to you by the state. Or you can buy Yandex shares (YNDX), which grew by 35% over the whole of 2019, although in October they declined by 20%. At the same time, you do not know whether Yandex will pay dividends or not, and shares will rise or fall. You take this risk for possible profit.

What risks do securities have?
Every security is associated with risks. Major financial and political crises affect the economy, the stock exchange and, as a result, securities quotations. Such global events affect all investment instruments, but each individual has its own risk factors. Bonds. The yield on bonds is known in advance and is paid out on a fixed date. The owner of a bond receives a coupon yield, i.e. a percentage of the bond's nominal value, usually every six months or a quarter. The bond has a price, and you can earn money by changing its value but it is quite stable.

What is a risk profile? It's an investor's attitude towards risk.
Risk profile depends on the identity of the investor, investment objectives and timing.

Why do I need a risk profile?
To properly allocate assets in your portfolio. When selecting tools in your portfolio, not only look at potential returns, but also assess the risks. Even if an investment is offered to you by a guru of the exchange, its profitability seems very attractive to you, but the risks do not match your investment profile do not agree. You have to be equally prepared for both loss and profit.

What types of risk profiles are there?
Conservative. An investor's goal is to preserve capital and protect it from inflation. The investor is ready to receive income at the level of the deposit rate. He is not inclined to risk, so most of the money, about 70-75%, invests in bonds of highly reliable issuers (government and corporations) and keeps it in a bank account. He invests the rest in stocks of the largest and most liquid companies: "blue chips and ETFs. In the case of shares, he receives dividend income.
Rational. The investor is ready to accept insignificant risk for the sake of potential profitability. Allow capital cost fluctuations in the short and medium term for the sake of potential returns. Keeps a balance: half of the capital invests in bonds and keeps them on deposit, 40% or more invests in equities and ETFs.
Aggressive. The priority of this investor is maximum return. He is ready to invest in high-risk instruments: shares of new technological companies, securities of emerging markets, IPO. He can work in the futures market and trade with leverage some brokers of such investors call them "professional" or traders. As a rule, they invest about 80% of capital in stock market instruments.
The division of investors into conservative, rational and aggressive is the most popular method, but not the only one. For example, "BCS Broker" distinguishes 7 types of risk profiles to form the most suitable portfolio for clients: conservative, moderately conservative, rational, moderately aggressive, aggressive, super aggressive, professional.

How to determine your risk profile?
If you want to use the services of a financial advisor, then at the very beginning of your cooperation he will offer you to fill in a small questionnaire on risk profiling, developed according to the standards of the Central Bank. Some brokers place these questionnaires on their website.

You can determine your approximate risk profile yourself. This is what you need to keep in mind.

Objectives and term of investment
Before you buy securities, you need to define your investment objectives and timing. If you need to earn a lot and in a short time (for example, you want to buy a car in 2 months), use an aggressive strategy. If you do not need the money to be invested in the next 5-10 years, you can invest in volatile, i.e. volatile shares. They can rise in price in the long run and provide higher returns.



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