Risk, Investment Return and Investor Profile

Before any investor starts their financial plan or investment plan, there is one basic principle that must be constanly remembered by the investor

and that is, the inverse relationship between risk and investment return.The higher the investment return, the higher the investment risk involved.This is a fundamental principle of investment and it is associated with every decision that the investor make.

 

In other words, the investment products or investment vehicles that promise the most returns (Commodity and Stock Options) are the most risky investments. They can generate higher return for the investor as they have higher risk, but it also means that they can cause higher loss for the investor too.

risk-investment-return-investor-profile 

On the other hand, the safest investment products like fixed deposit and bonds willl only bring small or steady return to investor but it also carries less investment risk too. The investor hardly will gain big money from this type of investment products but it also hardly will lose big money from this type of investment products too. 

Investor Profile

After the investor understands the relationship between risk and investment return, the investor will start to think of what type of investment products are suitable for him.This come to the process of understanding your own investor profile.Investor profile helps the investor to understand the risk that an investor is afford to take.Once the investor understand their investor profiile, they will know which type of investment products that they are comfortable to invest.You can find those investor profile quizzes from the internet or investment books. Another way for investor to know their investor profile is sleep test.If you invest in an investment products and you can't sleep well in night, this investment products are not suitable for you.

Basically, we can categorize investor profile to Highly conservative, conservative, middle range, entrepreneurial, and speculative.

High conservative are the investor that can take the lowest risk and the investment return are the lowest too.Investment products that are suitable for them are Government securities, bank-backed securities, trustee securities.Conservative investor can take higher risk than highly conservative investor.The investor are comfortable to invest in income-only investments, debentures, corporate bonds , certain investment products.Middle range investor can invest in growth shares, investment-linked trusts and international investments.Entrepreneurial can take even higher risk and can invest on Geared property, high growth shares, and international investment that bring high return.Speculative investor, the investor that can take highest risk, are comfortable to invest in investment products like Option Trading, Futures and collectibles.