Assessing your tolerance to risk, however, can be tricky. You must consider not only how much risk you can afford to take but also how much you stand to take; determining how much risk you can stand – your temperamental tolerance for risk – is more difficult. It isn’t quantifiable.
In determining a client’s ability to accept investment risk, Professional Capital focuses on the following factors:
Risk Tolerance Factors - Quantitative (tangible) in nature
Risk Tolerance issues tent to be financial or quantitative in nature. Based upon each risk tolerance factor, Professional Capital ranks a client’s quantitative ability to accept investment risk.
Factors taken into account: Current financial position, cash flow distribution needs, impact of inflation, longevity, how long will you money need to provide you for? liquidity needs, tax position, time horizon and legacy requirements and finally your overall risk tolerance assessment.
Risk Preference Factors - Qualitative (intangible) in nature
Risk preference is a client’s willingness to accept investment risk. Risk preference factors tend to be as important as risk tolerance. However, risk preference factors tend to be qualitative and subjective:
Factors taken into account:
Primary Objective, income vs capital growth, preservation of capital, market volatility (fluctuations), important trade - offs, investment constraints.
The combination of these factors is used to determine a client’s composite risk profile which leads to their target asset allocation between various assets.
Ultimately, the creation of a composite risk profile is a subjective decision based upon the unique characteristics of each client. One client may have the quantitative ability to accept risk, but is not willing to have significant fluctuations in their portfolio market value. In this particular example the client’s risk preference for lower volatility will likely dominate their risk tolerance and will be translated into a less aggressive allocation between growth/defensive assets.
Professional Capital works very closely with each individual client in making this extremely important decision.
To that end, we help our clients determine their composite risk profile by using FinaMetrica's risk profiling psychological questionnaire.
This comprehensive financial risk tolerance test gives reliable in-depth insight into our clients' financial attitudes, values, motivations, preferences and experiences. By making risk tolerance explicit and understandable, our clients are more confident of the advice and committed to the planning process.
The benefit of using it is to get a good idea of your risk tolerance and also to examine past volatility and past returns based on various asset allocation portfolios. It also helps us devise an appropriate investment strategy for your investment plans.
It provides with resources that enable us to educate clients about risk and return, and in managing their risk and return expectations.
It is true that the past performance is no guarantee of the future. But an examination of the past provides clients with a comfortable starting point for understanding the likely pattern of future returns.