An investor profile determines an investor’s goals, risk tolerance, and expected returns. It helps allocate funds into different asset classes and is determined by factors such as age, investment time horizon, and handling of losses. Conservative, moderate, and aggressive profiles exist, and portfolios are divided based on investment objectives.
An investor profile is a reflection of an investor’s goals and objectives. It defines how much risk someone is willing to accept and also the types of rewards or returns they expect. Based on this profile, an investor and a financial adviser can together determine where to allocate funds, because each asset class carries a different level of risk. An investor profile dictates how much capital goes into stocks, bonds, and other asset classes, and how much must remain in cash.
Certain criteria determine the profile of an investor. Often a financial advisor will ask a client to complete an investor profile questionnaire. The purpose is to find basic information such as the amount of money available to invest, when the funds will be needed, what the funds will be used for, and the age of an investor. An investor who is close to retirement, for example, will have a shorter investment time horizon than someone in their 20s or 30s.
The way an investor handles losses also plays into their investor profile. If a portfolio declines 20% in a year and the investor uses this as an opportunity to buy additional securities, his risk tolerance is high. However, if he liquidates the portfolio and sells everything, there is a low risk tolerance.
An investor with a conservative investor profile assumes the least possible risk. 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 reasonable understanding of the stock market and is willing to take some risk. An aggressive investor has advanced knowledge of financial markets and is not afraid of making risky investments. He should expect the highest rates of return.
A portfolio will be divided based on investment objectives. Government bonds tend to be the safest investments if the underlying government is not likely to default on its debt. Corporate bonds can be risky because if a company defaults on a loan, certain investors may not receive payments. A leading stock is an industry leader, and investors may feel more secure with a company with proven historical performance. A risky stock is one that does not have a proven track record or has shown signs of continued price weakness.
Smart Asset.
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