Risk Profiling is for the Self Examination

Before starting any investment, it is a good idea to test yourself. Self Examination, which can be called Risk Profiling has 3 Stages.

• Risk Required

• Risk Capacity

• Risk Tolerance

For example, suppose your are going to invest in the Equity(Stocks) Market. We know that the Stock Market is generally a high Risk investment product. Market Volatility is high in the short term is guaranteed in the Equity Segment. We cannot avoid this. This is what we call as Market Risk (Required risk). 

Only by understanding these type of requirements, we can balance in the Investing of Equity. However we would generate better returns in the long run. 

The Second risk is your Risk Capacity. This position will tell you that whether you have enough capacity to handle the risk or risk involved when investing in the Stock Market. Here we can find out how much you are going to invest and ensure about your Family will suffer financially if there is a loss in the Market.

Risk Tolerance means that you know the nature of your Risk Capacity and Market Risk required. At the same time, whether you are investing accordingly with your risk capacity or not. For example, few of the people do not have enough capacity to take high risk, but they take a high risk to lose money.

Some of have the potential to take risk, but they fear to take the related risk. So, both of them will make the wrong investment decision without properly measuring their Risk Potential. 

Generally a young person takes more risk in the Stock Market, due to possibility of longer income and create wealth in the long run instead of Short term volatility. Those approaching retirement are better off reducing the direct equity investments, and opting for Savings (Capital Preservation) is good.

But in the real time, they are doing in the opposite direction. Younger one is not taking enough risk and parking their whole money in the Saving account or any small savings instrument (No or very low Risk). Then the retirees to engage in high risk product such as Trading and Speculating in the Stock Market. 

Note: Investment Decisions can be made in the presence of a Registered Investment Advisor(RIA) or Qualified Financial Advisor is good and can properly test the Risk Profiling Method.

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