Your investor risk profile is a combination of both your risk capacity and your risk tolerance and directly affects the type of investment funds or options you should be considering.

Risk capacity is a measure of how much risk you can afford to take before it affects your financial goals and is affected by your investment timeframe.

If a single small investment is your only asset and you have a short timeframe then you are very reliant on the performance of that asset and would have a low risk tolerance. However, if you had multiple larger assets including investments, property, KiwiSaver and other investments then your risk capacity would probably be higher.

Your risk capacity tends to be higher when you are younger and have a longer period of time to achieve your investment goals. Short term financial goals significantly reduce your risk capacity and limit the type of investments you should be considering.

Risk tolerance is a measure of how much risk you are prepared to take to achieve your goals and often changes with your age, income and financial goals.

You may prefer investment returns to be less volatile being more comfortable with lower returns in exchange for lower risk. Conversely you may be comfortable with higher risk and potentially higher return investments that are much more volatile and subject to larger fluctuations.

So what does this mean?
Making sure you understand both your risk capacity and your risk tolerance and have made informed investment decisions are an important key to making sure your expectations are managed and your financial goals are more likely to be achieved.

Do you understand your investor risk profile?