What’s your risk profile?
The importance of understanding your risk profile.
One of the most important factors for SMSF members to understand is their risk profile. This will determine the type of assets in which the fund invests, and also helps give members peace of mind when markets are volatile.
One of the best ways to get a full understanding of your tolerance for risk is to initially use one of the many online tools available.
For instance, SMSF member Vicki Keane, who manages the investments for her and her husband’s SMSF, uses FinaMetrica’s risk tolerance test.
“It is very comprehensive and its recommendations for how I allocate funds are actually very close to the way I invest,” says Keane.
She says that her tolerance for risk has been affected in the past by unsuitable investments in which she was recommended to invest.
“So we are very wary. Consequently my profile is rather risk-averse. Having said that, I know I must take some risk for reward. I believe the best method for this is diversification.”
Keane explains she and her husband started the fund in November 2012 with a relatively small capital pool. She has been able to add to the fund since then, through prudent investing and other techniques.
“We also have some investments in Australian shares outside the SMSF that are doing well. We know we have a long way to go and our method is to be consistent in our approach to investing.”
The most important piece of advice she would give to other SMSF investors is to become educated about investing and financial markets.
“The first thing I did was buy a book; not anything heavy – it’s called The Devil’s Financial Dictionary. I guess because it’s light-hearted and entertaining, you tend to retain more. It does have a serious undertone though. It’s basically my bible and has proved its worth.”
Keane says some of her tips for successful investing include putting some time into cross referencing information, going to conferences to improve your knowledge and to subscribe to financial publications as part of the education journey.
“My advice is to not be afraid to ask lots of questions if you are using a fund manager. Don’t rush into things and learn to tune out the white noise. Over the last four years I have learned to listen to the inner voice. If it doesn’t feel right I just won’t do it, no matter what I may miss out on.”
She says it can often be a good idea to sleep on any investment decision before taking action. “You will always wake up the next day with a clearer head. But don’t fret too much over the daily ups and downs of the market. The best analogy I know is that the market is like a man walking uphill playing with a yo-yo. The yo-yo is always going up and down but he is still walking up the hill, which represents the long-term performance of the market.”
Don’t forget your risk profile will change over time, and it’s important to review it on a regular basis.