The risk profile of a property investor

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If you’ve ever been to see a Financial Planner before, chances are you’ve heard the term risk profile been thrown around, but what does that mean for a property investor? We have a different risk profile that we use for property investment through our property investment arm of the business.

Knowing and understanding your risk profile, is one of the single most important steps you can take before you invest, it is crucial.

What it means is how you feel about risk. It doesn’t matter what investment you make, whether it be in shares, in a race horse, or in property, there will be a threshold that you are happy to go to, and go above that and you will feel; ‘ahhh I’m not sure about this.’ For some people that is really, really high, and for other people it is really low, and somewhere in between this is where most people slide up and down. But it’s really important to understand where you are happiest, so you can know what to invest in, that will let you sleep at night.

It doesn’t matter where you are on the scale, there is no right or wrong, it doesn’t stop people from investing, and it doesn’t stop people from under investing, but just know it’s about understanding this, so you know your way forward.

There is one key difference for risk profiles between financial planning and property investment advice, with financial planning, its about how long you want to invest for; plus your comfort with risk. With property investment, we never recommend investing for a period of less than 10 years. Property is an illiquid investment, what this means is it can’t be sold over night. Keep this in mind, and always make sure you leave funds for emergencies. Another reason why diversifying your investments is important.

 

To work out your property Investment risk profile, complete the quiz below. Answer each question ranging from 1 to 10.

 

1. What degree of involvement do you wish to have in investment management?

For the first question answer on a sliding scale: 10 Actively involved – 5 Irregular involvement – 1 Minimum involvement

2. How dependent are you on income from your investment portfolio?

For the remainder of questions, answer on a sliding scale: 10 High – 5 Medium – 1 Low
3. How concerned are you about the security of your capital?

10 High – 5 Medium – 1 Low
4. How concerned are you about the impact of taxation on your investment returns?

10 High – 5 Medium – 1 Low
5. How concerned are you about any potential negative changes in the capital value of your investments?

10 High – 5 Medium – 1 Low
6. How important is it that the growth of your investments beat inflation?

10 High – 5 Medium – 1 Low
7. How important is it to maximise the potential of your investment performance?

10 High – 5 Medium – 1 Low
8. How important is access to your investment capital?

10 High – 5 Medium – 1 Low

 

Count up your total score and find your risk profile below.

 

A.  You scored 65-80

You are a cautious investor to whom security of capital is of major importance. You tend to seek returns where possible from investments providing high security of capital and low investment risk. You understand that there is an opportunity cost in maintaining this level of security and the real value of your funds may erode over time.

B.  You scored 49-64

You are a conservative investor who has some concern about the effects of inflation and taxation. You seek a well-balanced investment structure to meet income needs and facilitate some capital growth, while still providing for a low risk and low volatility of investments. You understand that the value of your funds, in real terms, may erode over time.

C.  You scored 33-48

You are a balanced investor who seeks to establish a well-balanced medium to long term investment strategy to combat the effects of inflation and taxation. Security of investment is sought through the construction of a well-balanced investment portfolio and the spreading of funds across a broad range of quality investments. Your investment strategy must satisfy income needs and provide for a reasonable rate of return. You like to protect potential risk, it is likely you will not be comfortable borrowing more than 80% of your total property portfolio.

D.  You scored 17-32.

You are a growth investor who seeks a medium- to long-term investment strategy to facilitate growth of real net worth. You want to be more actively involved in your investment strategy and are inclined to accept a higher level of volatility and risk that has the potential to achieve higher rates of return. Your overall strategy may contain some level of investment gearing. You may be happy to borrow slightly over 80% if it gets you in to a potentially good investment faster, you see this as a cost to meet your goals.

E.  You scored 0-16.

You are an aggressive investor motivated by the aim for real growth in net worth over the medium to long term. You are well aware of the risk/reward relationship and are prepared to accept higher levels of volatility and risk to increase the potential for higher long-term capital growth. Security of capital is secondary. You may be happy to borrow up to 95% and see lenders mortgage insurance as an opportunity cost.

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