6 Steps to Determining Your Investor Profile - Grand Ascent
6 Steps to Determining Your Investor Profile
Today, women of all ages and from all walks of life are increasingly making important financial decisions for themselves or for their families. Many women have been in the workforce for their entire adult lives and have their own assets to invest. As a woman, your life events and your unique perspective will dictate your investment decisions. You need an investment plan that takes your whole life into consideration. An investor profile does just that.
An investor profile is an outline that spells out your investment preferences, before you even begin to make them. It takes all of your needs and wants, as well as your current life situation into consideration. Based on your risk tolerance, it determines the types of investments that would suit you best and how they should be managed.
#1) Understand Your Current Circumstances
Your life stage and your responsibilities will have a large impact on your investment strategy. If you are in your 20s and have no children, you can invest more money and be more aggressive in seeking growth. If you are in your 50s and you are nearing retirement, putting children through graduate school, and paying off the remainder of a mortgage, you will clearly invest differently.
Think about these things before you proceed to step two.
#2) Figure Out Your Investment Objectives
The second step is to consider your objectives and figure out what you are trying to get out of your investments. Do you want income, growth, or a combination of the two? Do you plan to invest for the long term… say, for retirement in 35 years? Or do you plan to invest for the short-term… perhaps to buy a home soon?
To do a more thorough analysis, check out this list of investment objective questions from Worldwide Financial Planning.
#3) Determine Your Risk Tolerance
This step is the key to the process. Take all of the information you gathered in steps 1 and 2, then decide if you are willing to take a low, medium or high risk.
If you are willing to accept a greater degree of risk and volatility in exchange for the opportunity for higher returns, you have a high risk tolerance and you are considered an aggressive investor.
If you are willing to accept some risk and volatility for the opportunity for higher long-term returns, you have a medium risk tolerance. You are a moderate investor.
If your goal is to preserve your investments, rather than make higher returns, you have a low risk tolerance. You are a conservative investor.
For a little extra help on this step, check out this risk tolerance quiz from Rutgers New Jersey Agricultural Experiment Station.
#4) Figure Out Where to Invest
Based on your risk tolerance, you are now ready to figure out where to invest your money to achieve your goals.
If you are an aggressive investor, your portfolio should contain mostly growth, small cap, and sector mutual funds (or stocks or ETFs). If you select any fixed-income mutual funds, make them a small percentage of your portfolio and make sure they are of the riskier types that are aggressively managed.
If you are a moderate investor, you will focus on regular income with some growth potential and savings. Aim to diversify your portfolio with a balanced mix of conservatively-managed bond funds as well as high-risk stock funds. Use a large number of asset classes to reduce risk and increase profits. You should choose both safe and risky asset classes, which will balance profits and losses.
If you are a conservative investor, your portfolio should focus on savings by holding a mix of guaranteed investment certificates (GICs), savings mutual funds, and savings accounts.
#5) Plan For Various Investment Scenarios
Next, you should know how you will react to various “what if” scenarios, based on your current situation:
What if the markets fluctuate?
What if you need my money for something else?
What if you don’t get the returns you expect?
What if inflation increases?
#4) Stick to Your Investor Profile
Until your life changes, you have to stick to your investor profile. Otherwise, what was the point of all that work you just did?
You should keep the same investor profile unless…
Your financial situation changes. For example, you inherit money, retire, or lose your job.
Your life changes. For example, you buy a house, have kids, or start a business.
You need your investments for something else and you have to withdraw money earlier than expected.
A solid investor profile will give you a firm grasp on what you need from your investments. It will lay out your expectations. Then, it will help you find the right path to achieving your financial goals.