Determining the risk profile is the starting point by which any saver should initiate an investment process. Thus, we can know if a particular product is good for us or not and avoid unwanted scares. But what is the risk profile? According to the CNMV, this one "Is defined by the relationship between the risks that are willing to take and the expected returns." In this way, investors are usually classified into three types: conservative, moderate or aggressive. The most conservative will be those who are not willing to assume any type of losses in their portfolio, even at the risk of obtaining poor returns; and the most aggressive will be the one that assumes certain risks in order to obtain a performance bonus.
But how do I determine my risk profile? The first thing to say is that it is not a simple process, since the perception of our ability to take risks as investors is subjective. One may think that he is able to invest in a risky asset (in search of higher returns) but realize that he can not sleep at night due to the fear of losing much of the investment. But nevertheless, You can always analyze several factors to try to determine our profile in advance.
One of them is the time horizon of our investment, a crucial issue that is often related to the years left to the investor to access retirement. In this sense, investors with a long time horizon are usually recommended to allocate a large part of their portfolio to higher risk assets, such as equities, in order to obtain higher returns and beat inflation. This is because Equity has proven to be the asset that yields the highest returns if we take into account very long time horizons, in which the correction periods are compensated by the bullish phases. On the contrary, investors are usually advised to need their capital in less time than to invest in lower risk assets such as fixed income.
Another issue that must be assessed when determining the risk profile is whether I may need the money I have reserved for investment or if I have other reserves for contingencies. Logically, if I do not have savings to cope with unforeseen situations, I will not be able to take a lot of risk until that need is covered.
Also, the experience is a degree. Investors with experience in investing in funds or stock markets are more able to assume volatility than the rest. They know what they are facing and, therefore, tend to have a higher risk profile.