My Investment Risk Profile

Attempting to determine our own investment risk profile is very subjective aspect. This is because of personal bias creeping into our analysis, natural tendency to be perennial optimistic, and biasing due to business media projections. I believe that risk profiling is very much individualistic (i.e. one individual or one family). Every individual will have a unique risk definition. Now it is possible that qualitatively, the risk profile could be classified in similar groups. However, quantitatively it would be different for each individual.

I view my risk profile in three different dimensions. These three dimensions of risks are (1) Time; (2) Capacity; and (3) Tolerance.

  • Time is associated with my financial goals and what I want achieve in short-term, intermediate-term, and long-term.
  • Capacity is how much I can afford and how much I can stretch in my investments. This is an actual Rupee amount. e.g. Do I have ten lac rupees for investments, or do I have only ten thousand rupees to invest, or do I have only ten rupees at regular intervals.
  • Tolerance is how much volatility in my investments I can afford. This could be percentage based or actual rupee amount.

In short-term (i.e. next 2-3 years), I expect expenses for buying our first apartment, perhaps one additional transportation vehicle, and cash reserve for six month worth of expenses. In this case, I have a planned rupee amount (i.e. capacity) for which I have zero tolerance. Therefore, all of my investments are in fixed income vehicles. Here there is nothing to manage. Practically, I spend zero time managing this part.

In intermediate-term, i.e. next 6-8 years, based on our projected expenses and family’s projected state-of-finance, I am willing to allocate a certain rupee amount that can tolerate some level of fluctuations. Let us take an example. I have no issues or problem if my one lac rupees investment may go down by 25 to 30%. However, I have a problem if it goes down by 50%, because given the timeframe, this investment can become a negative preposition.

In long-term, i.e. 10 years and beyond, I am willing to allocate capital that can take higher fluctuations. Longer timeline builds-in wider tolerance, because I do not have any immediate need to access this capital. A sub-part of my income portfolio is a long-term strategy. Majority of this discussion on this blog will focus on this aspect of my risk profile (long-term income generation).

With this definition of my risk profile, I have framed my investment strategy and different investment buckets. It allows me to allocate capital accordingly. I will discuss in this future posts.

What is your investment risk profile? What process do you use for capital allocation? Let me know using comments sections below.

Facebook User Comments:

7 Responses to “My Investment Risk Profile”

  1. Allen Taylor says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. Hi,
    Well written.Its important to have the goals in mind before we even start the journey.

    However, it would be more interesting if you could give the investment allocation in various vehicles.
    Given the 10 year scenario you present, I think i would not put my money in the equity markets.I would rather put it in ELSS or Mutual funds which are less volatile and also give me tax benfits at the same time.

    • TIP Guy says:

      • My % allocation is based at three levels
      • 1st level – my risk profile (short, intermediate, and long term), the article above discuss this part.
      • 2nd level – based on my sub-portfolio objective. Shortly, I do plan on providing higher level summary allocations on percentage basis only. It will be titled “My investment buckets – an overview”. Stay tuned !!
      • 3rd level – focusing on my objective of income generation, I use diversification/ different assets. It is also a major % of my portfolio. Since this is the subject of this blog, all future discussions will be on this topic and more in-depth. So keeping reading!!

      Regarding not putting money in equity markets – I have a difference of opinion. It depends upon individual scenario. If an individual has a capital that one may not need for next 10 year, these are the best time to enter equity market. OR an individual can certainly put some percentage in equity markets. Indian economy will continue to grow. If we look back 10 years (1998/99), don’t we wish now that had we invested at that time ? Additionally, if you continue to invest in fundamentally strong companies with sustainable business model, they will continue growing. Now is the right time to invest in them, buy low…….

      BTW – mutual funds are also invested in equity market! I personally do not like investing in mutual funds. You can read my views in “about” section.

      And finally, dividends paid by companies are tax free for individual investors..…..

      Thanks for stopping by !

      Best Regards,
      TIP Guy

  3. Sherin says:

    I totally agree with this article. Your concept is fairly good and any one can adapt to identify the risk profile in a reasonable way by using this.

    Thanks, Sherin

  4. Hi, i thinhk that i saw you visited my webloog so i came tto ?return the favor?.I am attempting too find things to improve my site!I suppose its ok too use a few of your ideas!!


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