An investor’s profile determines how much capital should be invested and how much cash should be held.
An investor profile is a reflection of an investor’s goals and objectives. It defines how much risk a person is willing to accept and also the types of rewards or returns they expect. Based on this profile, an investor and a financial advisor can together determine where to allocate resources, as each asset class presents a different level of risk. An investor’s profile determines how much capital goes into stocks, bonds and other asset classes and how much should remain in cash.
An investor with a conservative investor profile takes as little risk as possible.
Certain criteria determine an investor’s profile. Often, a financial advisor will ask a client to fill out an investor profile questionnaire. The objective is to know basic information such as the amount of money available to invest, when the resources will be needed, what they will be used for and the investor’s age. An investor who is nearing retirement, for example, will have a shorter investment horizon than someone in their 20s or 30s.
The way an investor deals with losses also influences their investor profile. If a portfolio declines by 20% in a year and the investor uses this as an opportunity to buy additional bonds, his risk tolerance is high. If, however, he liquidates the portfolio and sells everything, risk tolerance is low.
An investor with a conservative investor profile takes as little risk as possible. The returns on a conservative portfolio may be modest, but so is the chance of losing money. Someone with a moderate investor profile has a fair understanding of the stock market and is willing to take some risks. An aggressive investor has advanced knowledge of financial markets and is not afraid to make risky investments. He should expect the highest rates of return.
A portfolio will be split based on investment objectives. Government bonds tend to be the safest investments if the underlying government does not tend to default on its debt. Corporate bonds can be risky because if a company defaults on a loan, some investors may not get paid. Regulatory action is an industry leader, and investors can feel safer with a company with proven track records. A risky stock is one that has no proven track record or has shown signs of continued weakness in its price.