No two investors are alike – we all have our own goals, investment timeframes and risk appetites. That’s why your financial adviser works with you one-on-one to understand your personal investment style and make sure your portfolio is the right match. Ups and downs in the market are a natural part of the investment cycle, but they can affect everyone’s emotions differently. Just as every person is unique, we all respond in our own way when things don’t go according to plan. So how do you react to market volatility? Do you panic at the first sign of uncertainty or do you stay confident even when the markets fall? For example, when the Dow Jones Index fell dramatically in February this year, sending shockwaves through investment markets around the world, some concerned investors considered selling up to avoid further losses – while others remained calm throughout the fluctuations. But it’s easier to maintain confidence during periods of volatility if you have a portfolio that matches your appetite for risk. That’s where financial advisers play a vital role. At the beginning of the advice journey they ask a series of questions designed to find out what kind of investor you are so they can allocate your assets appropriately.
What are your goals and timeframes?
In your first meeting with your financial adviser, they would have asked you about your financial goals and investment horizon. Each goal may have a different timeframe – and even its own risk profile – and this can play a big part in shaping your overall strategy.
Your financial adviser makes sure that your investments support a combination of short, medium and long-term goals – from those you want to achieve in the next few years right up to your plans for decades into the future. They help you work out a specific timeframe for each goal, so you have an idea of how much your investments will need to grow during that period. For example, you might be aiming to save for a house deposit in the next 12 months. Or else, you might want to focus on growing a healthy nest egg so you can retire in 10 years. As you move closer towards each objective, your investment horizon shortens and your financial adviser updates your investment strategy to match. That’s why your annual reviews are so important – they’re an opportunity to check that you’re on track to reach your investment goals.
How much risk are you willing to take on?
Before tailoring your investment portfolio, your financial adviser has already completed a personal risk profile, to make sure you’re comfortable with the level of risk you’re taking on. In general, the higher the risk, the greater the potential returns you can earn over time. But before you can reap the rewards of high-growth investments, you’ll need to ride out any short-term fluctuations in the market. Broadly speaking, investors can be grouped into three categories:
- Conservative investors tend to prioritise stability over capital growth. They want low-risk assets that will provide a steady income stream, even during periods of market volatility. A conservative portfolio will therefore be weighted towards defensive assets like cash, bonds and term deposits.
- Balanced investors are willing to take on some risk in return for moderate capital growth. Their portfolios may include a mix of growth and defensive assets, so they can generate some income while also enabling their capital to increase.
- Growth investors are confident about having a higher risk exposure so they can maximise their capital growth over the long term. Their portfolios are likely to include a high proportion of Australian and international shares, which may each experience greater short-term volatility.
Your risk appetite is likely to change as you move through different life stages. While you’re young, you may be in a better position to pursue a high-growth strategy as you have more time on your side to cope with market fluctuations. As you approach retirement, it might make sense to switch to a more conservative portfolio, with the guidance of your financial adviser. They can shape a strategy to protect your capital while creating a stable income stream for your golden years.
How do you react to volatility?
By their very nature, markets constantly go up and down. There are many factors that can cause these market movements such as global trade, consumer spending and confidence, political events and even natural disasters. In times of volatility, however, it’s understandable that some investors may feel nervous about the potential impacts on their wealth.
When completing your risk profile, your financial adviser has considered how well you’re prepared to handle the highs and lows of the market cycle so you’re not taking on unnecessary risk. And don’t forget that, even though share markets regularly fluctuate, they tend to move upwards over time – which is why a long-term view is essential. That’s why you should always think of your investment plan as a marathon, not a sprint, and remain focused on how you are tracking towards achieving your financial goals.
If you have any concerns about how your investments are progressing, your financial adviser should be your first port-of-call before making any major decisions. They can revisit your financial strategy to make sure it’s still appropriate for your situation and goals.
How often do you speak to your financial adviser?
Your financial plan is just the beginning of your journey – and your financial adviser is there to guide you along the way. But that’s why it’s important to keep them in the loop about what’s happening in your life and get in touch right away when things change. To give your investments the greatest chance of success, it’s important to keep the lines of communication open. So it’s worth asking yourself if your goals have changed since the last time you talked to your financial adviser – and checking whether your plan is up to date. Remember, your financial adviser is on hand when you need to speak to them. By letting them know about changes to your circumstances or goals, they’ll be able to adjust your strategy and make sure your assets are suited to your investment objectives. That way, you can be confident that your money is working as hard as it can for you, so you can stay on track towards achieving your goals.