Risk profiling – Ability, willingness, and asset allocation
Everyone becomes a risk-taker when the market starts to move in upwards direction. People start thinking about the profit they will make through investment.
When the market starts spiraling downwards, that is when the actual risk profiling comes in the picture. There are a few essential points to understand before moving to discuss risk profiling and asset allocation.
What is risk profiling?
Risk profiling is a condition of an individual’s willingness to take risks and the ability to take risks.
What is the risk-taking ability?
In simple words, the risk-taking ability means the ability that an individual has to take risks. Various factors depend on the risk-taking ability like nature of the occupation, age, earning members that the individual has in the family, financial responsibility, nature of the accommodation, and much more.
There are various internal factors that affect the risk-taking ability of an individual too. The risk-taking ability is divided into three different categories which are:
What is the willingness to take risks?
The risk that a person is willing to take in total is known as the willingness to take risks. There are many external factors that influence the willingness of a person to take the risk.
A lot of those depend on the market, like how the market is performing, what is the position of the market, where the market is leading right now and much more.
When the markets are doing well, then the risk-takers invest in them properly, and when the markets aren’t doing so well, then the risk-takers start shifting their portfolios towards the debt instruments because that helps them in avoiding the losses that can happen.
It is a personal trait of a person if they are willing to take risks or not. There are a lot of factors that encourage or discourage their willingness to take risks like past experiences, peer pressure, and much more.
The willingness to take risks is further divided into four categories which are as follows:
- Moderate / balanced
- Very aggressive
Risk profiling and asset allocation:
Risk profiling and asset allocation go together and parallel to each other because both the terms are interconnected in their own ways.
Though asset allocation cannot be alone done on the basis of risk profiling. Many other factors come into play with the risk profiling and asset allocation like your own goals. It very much depends on the goals that you have in life.
There are no defined solutions for asset allocation when it comes to risk profiling. The duration of your goals will play a very big role when it comes to asset allocation and risk profiling.
There are different risk-takers, and all the situations will vary from each other. You cannot depend on one thing at all times because you have to look at the scenario of the market and analyze it well before you take any risks.