The importance of diversifying your portfolio is constantly reiterated, but how do you determine how to diversify?
Portfolios should have low-risk and high- risk investments. Low-risk investments are bonds, fixed annuities, etc. while high-risk investments are international shares, crypto assets, etc.
Depending on the individual and their risk profile, the split of low-risk and high-risk investments will differ.
A risk profile is an evaluation of how willing an individual is to take risks. It is possible for an individual to conduct their own risk assessment, although it may not be ideal.
You will need to ask yourself how much risk you are willing to take, how much risk you are capable of taking, and how long you plan to invest.
However, answering these questions isn’t as simple as looking at your bank account and picking a number you feel comfortable with. To gauge a better understanding of your risk profile, these 3 main questions can be extrapolated into more in-depth questions.
Progressively, answering such questions is no longer as obvious or straightforward. There are ways to calculate the answers to these questions through algorithmic calculations, but even then, you may not be able to weigh and compare one question to another. How do you distinguish the importance of one answer against another in an effective way?
Essentially, this process, although it may sound straightforward, can quickly become complex. When it comes to investing, putting your best foot forward is the goal. Seek the assistance of a professional who has an objective and thorough outlook on your risk profile.
Once they have given you their risk assessment, you are still free to make the investment choices you want i.e. even if they state that you can afford 60% high-risk investments, if you are not comfortable with this you are not obligated to stick to that percentage.