Risk profiling and your investment choice

Complete the following quiz to understand your risk profile (choose the answer most appropriate to your situation).

1. What’s your favourite leisure activity?

1. Reading a book by the fire
2. Going to the beach
3. Mountain-biking
4. Canyoning

2. What’s your idea of a dream holiday

1. A coastal weekend getaway
2. A cruise of New Zealand
3. A tour of France and Germany
4. Hiking in Nepal

3. What keeps you awake at night?

1. Worrying about my family
2. Worrying about my job
3. Worrying about where I’m going to take my next holiday
4. Not much at all

4. What is your most important personal life goal?

1. To be happy and content
2. To be successful at work
3. To be wealthy
4. To be an entrepreneur

5. How much would you be prepared to lose in a market downturn?

1. Nothing
2. $500
3. $5,000
4. $10,000 or more

6. Would you consider borrowing to invest?

1. No
2. Maybe
3. It depends on the investment
4. Definitely yes

7. How often could you live with your portfolio having a negative year?

1. Never
2. Once every 20 years
3. Once every 10 years
4. Once every 7 years

8. How long are you investing for?

1. Five years
2. 10 years
3. 15 years
4. 20 years or more

9. What would you do with a $20,000 windfall?

1. Spend it
2. Bank it in a savings account
3. Invest it in a diversified equity portfolio
4. Invest it in some interesting alternative assets with a high-return profile

10. If the share market fell by 20% what would you do?

1. Sell out of my shares and put the funds in a bank deposit
2. Sell the shares that had fallen the most
3. Do nothing and expect the shares to recover
4. Look for good quality shares at cheap prices to buy

Your risk profile results

Mostly As – Defensive

If you chose mostly As , then you are very concerned by any prospect of losing your money. This is an important consideration when choosing your investment profile and knowing this will help you steer away from investments that make you nervous.

Mostly Bs – Conservative

You’re more comfortable with risk but still don’t want to take on too much, regardless of the potential return. A conservative risk profile means you are focused on preserving your investments and existing investment income.

Mostly Cs – Moderate

You are looking for the higher returns that a higher risk profile will deliver. You are comfortable with a year of negative returns here and there as you know that you will be able to make it back over future years.

Mostly Ds – Aggressive

You prefer to invest in assets that have a higher risk as there is a higher chance of return. You can tolerate big falls in your investments, as you understand that with the risk levels you are comfortable with, you will be able to recoup your losses (and then some) over the longer term.

Investment profiles

Whether you have an SMSF or invest via a retail or industry superannuation fund you will need to decide on an investment profile. For SMSFs this will be included in your investment strategy, but if you invest via a larger fund you will have a range of investing options available to you.

Super funds now provide a vast range of options to members – some funds even offer the option of investing directly in shares – but they will also include a suite of five or six pre-mixed investment options. These options are defined by their allocation to growth assets and defensive assets.

Equities, commodities and private equity are considered growth assets. Cash and fixed interest i.e. bonds, are considered traditional defensive assets. Property and infrastructure have both growth and income-generating properties which leads them to being classified as mixed growth/defensive assets.

The following are the kinds of investment profiles that you will be able to choose from depending on your risk profile, starting with the most aggressive risk profiles, tapering down to the most defensive.

Investing over your lifecycle

Your investment profile and asset allocation should be something you review over your lifecycle. Your capacity for risk will be different during different stages of your life. When you are young and have plenty of time to make back any losses, you can afford to take on larger allocations to riskier growth assets. But as you get older and are more protective of your capital as you get closer to retirement, you may look to switch to a more conservative asset allocation with a higher allocation to defensive assets.

If you are an SMSF trustee, your investment strategy and asset allocation should be something that is considered annually during trustee meetings. If you have your superannuation in a large fund you should remind yourself to review your investment option at least every five years to see if it is still appropriate.

Super funds are also now offering “lifecycle” investment options which automatically change your investment profile and asset allocation depending on the year you were born in. Younger superannuants will have higher growth asset allocations while older members will have higher allocations to defensive asset classes.

Direct investments

As they compete with the growing SMSF sector, large APRA super funds are offering the ability to tailor your investment choices almost as much as you could in an SMSF. The direct investment options they offer may be limited to the ASX/S&P 200 or ASX/S&P 300 shares, but they will probably also include exchange traded funds which would enable you to add international equities to the mix.

There are over 200 ETFs available on the ASX, across a range of asset classes, including fixed income and global equities. There are also sector-specific and strategy-specific ETFs which would allow a very high degree of diversification in a direct investment portfolio.

When choosing direct investments with your superannuation fund, it is just as important to understand your risk profile and apply it to your investment choice. Investing in a small cap global ETF would not be advisable for somebody with a defensive risk profile but would be more suited to somebody with an aggressive risk appetite.

There are also parameters around how you can invest in direct investment options. You need to keep a certain amount in another investment option within the superannuation fund (usually around 10 per cent), and there will most likely be a minimum amount that you need to have in superannuation to be able to access the direct investing investment choice. To limit concentration, there may be a maximum amount (around 20 per cent) which can be invested in any one share.

Investments via a direct investment option will be held in your fund’s name, not yours and in addition to certain shares and ETFs you should also be able to invest via the direct option in term deposits.