Imagine this: On the first day of your swimming lessons, you were told to jump in the deep end of a massive pool. What would your reaction be?? You’d probably be scared out of your wits. Obviously you are inexperienced, and you are still a long way from becoming an expert; hence the risk of diving into the pool is very high. On the other hand, if you told an ace swimmer to do the same, it would probably be child’s play for him. He is experienced and for him the stakes are very low.
Just like swimming, in stock investing one size does not fit all. We all know that we need to invest in stocks to beat inflation and earn great returns. But most of us are scared to invest, because of the risk involved. Also, the amount of risk each person can actually take depends on many factors like his age, income, past experiences etc. Hence, each individual’s risk appetite is unique and this risk appetite must be the determining factor for the kind of stocks that he should invest in. Stock investing, much like batting, is a game of different strokes for different folks that depend on an individual’s risk appetite and profile.
So, what do you mean by risk profile?
The risk profile of a person is an inherent characteristic which determines the type of investment options you should invest in. It depends on 2 factors i.e. Risk taking ability and your willingness.
Just to give you an example if a 55 year retired person, in need of a steady income invested in small-cap stocks, it would leave him in a rude shock. By investing in small caps he would be taking on way more risk than his ability.
Thus, it is only once you know your risk profile that you should decide on your investment plan. And this risk profile should be a function of both i.e. the amount of risk you are able to take based on your age, income, responsibilities and your willingness to take risk based on your past experiences etc. This risk profile will determine the proportion of money you should invest in equity and non-equity. Taking the above example forward, the retired person’s ability to take on risk will be low, based on his age, his income etc. Hence he should ideally have a small portion of his investments in equity (around 10-20%). Also, this portion should mainly be in Nifty or large-cap stocks (i.e. safe stocks), that assure good returns with relatively lower risk.
Similarly, if you tell a 25 year old who has just started earning good money to put all of his money in a fixed deposit; it will do him no good. He has age on his side, has a good income and there are chances he will be more willing to take on risk as his other responsibilities may be less. In such a case the ideal scenario for him would be to have a larger proportion of his investments in equity rather than put it in a bank FD. Also, he can take the risk of investing a good chunk of his equity portfolio in mid-caps and small caps (high risk high return stocks).
So as you can see, knowing your risk profile is the first and the most critical step to investing in stocks. It helps determine your proportion of investments in equity and also within the equity portfolio what kind of stocks to invest in (i.e. large-cap, mid-cap or small cap).
So, how do you find out your risk profile and a suitable investment plan?
To help you do this, MoneyWorks4me.com has launched a unique tool called the Equity Game Plan. This tool analyses your risk profile and gives you a suggested allocation of the kind of stocks best suited to your risk profile. As investors we always have many questions in mind while investing in stocks – How much risk should I take with my stock investments? What is the ideal equity portfolio for me taking my risk appetite into consideration? The Equity Game Plan gives you the answers to these very questions.
a) It helps you discover your risk profile (based on your ability and willingness to take risk) and gives you an insightful analysis about how averse or comfortable you are to take risk.
b) It gives you the best-suited investment strategy based on your risk profile. (for example whether your strategy of investing should be ‘Conservative’ or ‘Aggressive’.
c) It gives you the asset collection and the equity game plan best suited for you. For example what proportion you should invest in equity and a segregation of your equity portfolio with safe stocks like large-caps or the riskier ones like mid-caps and small-caps.
Also, MoneyWorks4me.com goes a step further and gives you a tailor-made solution that helps you earn great returns through safest stock investing. And what’s more is that this tool is completely FREE to use!
So, what are you waiting for? Do check out your risk profile and get your personal stock investment solution here.