Risk Profile

Wednesday, October 23, 2019
Risk Profile

Written by Hudson Adviser Phillip McGann

Your Risk Profile is like your Financial Investing DNA

A Hudson member’s Risk Profile is a very important document.  It is used by your Hudson adviser to inform them of your attitude to risk.  It is effectively the primary determinant of the asset allocation recommended to you by your adviser to achieve your long term financial goals.

So it is vitally important to get it right and to keep it relevant and up to date.

Hudson does this primarily via a written Risk Profile questionnaire (included as part of the Personal Financial Profile) and secondarily via your discussions with your Hudson Adviser to analyse your overall financial situation including your stated risk profile.  

Your Risk Profile tells your adviser where you as an individual investor sit in the range from Conservative to Aggressive Investors.

It is the all important arbiter of how the balance between defensive allocation and  growth allocation is set for an individual.

A Hudson Member’s Risk Profile is more important that anything else when it comes to what to invest in. 

Determinants of an Individuals Risk Profile

Many things have an impact on your risk profile but deep down it is intrinsic to an individual   There is no “right” or “wrong” level when setting your risk profile.  It is innate in you.  It is a mixture of your life experiences, your overall level of aggressiveness, and your past investing experiences.  Effectively it is your financial investing DNA summarised in a raw number.

Some would argue your age is the sole or even a key determinant of your risk profile. The theory goes that when we are young we are aggressive and willing to take on a lot of additional risk to achieve our financial goals safe in the knowledge we have time up our sleeve if something doesn’t go right.  Conversely as we age we get more conservative as we try to protect our asset base. 

I disagree with the premise that your level of aggressiveness is determined solely by the year you were born in, I feel your risk profile is innate and is not solely set by how old you are.

Case in point; I have a lot of very aggressive 70+ year olds I deal with and I likewise have a lot of conservative 30+ year olds.

The Super industry in particular get this scenario wrong when the simply set an asset allocation for a 50 year old that is more conservative than a 30 year old.  

There reasoning - on the surface - if that the time frame for a 30 year old is longer than a 50 year old. 

This is broadly true but the investing time frame for a 50 year old is still 30 years + under life expectancy tables and for a 30 year 50+  Both are very long term time frames in investing terms and provide plenty of time to recover for any misshapes that might occur even in retirement when you are drawing from your asset returns.

What is more likely in the Super example is that categorizing individuals by age makes the process of investing large sums of funds so much easier and cheaper.  Why not take the time to analyse an individuals risk profile correctly and then invest the funds accordingly to achieve the right outcome?

This costs time and resources that the Super funds simply don’t want to allocate when they can simply say “all those born  in 1960 should be invested this way Full Stop” and any client who doesn’t tell them different is allocated to the default setting  

It is not logical to do that unless you are more concerned by the bottom line than the clients overall financial well being.  This process alone is costing many individuals ten thousands of dollars at retirement as they have not been investing according to their “risk profile” but simply there age.

Should we always simply invest according to our Risk profile?

Not necessarily in the very short term.

If you only have 1 year to invest a sum of funds before it is required for other purposes you would not necessarily invest it into International Shares just because you are a very aggressive individual.

In this case the actual time frame on an investment will determine the type of assets you invest in.  Those that fit better with the time horizon you have set.

You would select the short term investments based solely on the time frame in question and not on  how aggressive or conservative you are overall.

It is only over longer time frames (3 years+) that your Risk Profile will inform more accurately your asset allocation.  

So does you Risk Profile change overtime? 

Yes, it can but in my experience only slowly and mostly marginally.  The more experience an individual has of investing, and the more educated they are on investing concepts the more comfortable then feel with the overall concept of investing and they can become more aggressive over time. 

Likewise as you age you may well become slightly more conservative but not dramatically so. 

However your Risk Profile does not and should not abruptly change due to severe movements in financial markets. 

If the share market falls 20% and you are devastated and heartbroken at your paper losses and move quickly to sell out your remaining positions than perhaps you should not have been invested as aggressively as that in the first place? 

Maybe your Risk Profile was being dictated by the short term euphoria of a quick return and not considering the potential volatility that comes with aggressive strategies that require longer term perspectives.

If you would like to discuss your Risk Profile in more detail with you Hudson Adviser please call 1800 804 296.  You can download a PFP which includes a Risk profile from the Hudson website here Personal Financial Profile




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