It is easy to assume that because you have a spread of investments across a variety of asset classes that you are adequately diversified. However, this is a common mistake that can be made if you don’t use a financial advisor.
A qualified financial advisor can help you understand and make sure that you are invested in the right asset classes for your needs while also helping you to understand the nature of the investment, including the possible risks.
Let’s talk about your attitude to risk
The first stage of building a rock-solid investment plan is assessing your own attitude to risk or your own risk profile. There are probably three risk profiles that most people will fall under. These are:
1. High Risk.
These are people who don’t mind volatility throughout the course of their investment. They are aware that taking a high-risk approach may mean that they can lose some or all of their money. The primary motive for this type of investor is to achieve the high returns that can potentially arise if the investment goes their way. This investor will benefit from high points in the market, but when things go bad, they will suffer potential losses.
2. Medium Risk.
This is the category of the risk profile that the majority of people tend to fall into. The medium-risk investor will expect an investment journey that is less volatile than the high-risk investor but is willing to accept some movements in order to achieve the potential gains.
3. Low Risk.
The last category is the low-risk category. This strategy is designed to be safe in that the value of your money should not fall in value or possibly have a set amount below which the investor is unwilling to go below. This type of investment strategy will, in general, provide a low return. The low-risk investor requires the comfort that the investment will not be liable to massive swings in value.
Your investment plan should fit your overall risk strategy and risk profile. One of the key fundamentals of forming your investment strategy is to identify your own attitude to risk. Therefore, you must ask yourself:
Are you prepared to suffer losses during periods of the downturn — such as the one we are in right now — to have the potential to achieve returns when the markets are good?
Do you simply want to consolidate what you have and know that it is going to stay at the same relative value over the long term?
By doing this, you will then be able to narrow down your investment options.
The fundamental part of developing your investment strategy is to know that each investor will be different. Each person will have different requirements, different needs, different goals, and different objectives. It is important, therefore, to develop an investment plan specific to your needs. Your financial advisor will be able to identify your risk profile and develop a financial plan around that.
The best way to develop a plan to suit your needs is to engage with a financial advisor to come up with a suitable strategy, including the right investment, the right asset class, the right time frame, and the right diversity of assets within that. It is important that you become actively engaged in managing and building an investment plan that suits you.