Next Investors logo grey

Why you need to know your risk profile

Published 09-APR-2021 12:39 P.M.


2 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

As an increasing number of first-time investors enter the stock market, we are finding that they are investing in areas that are not only unsuitable for them but also their portfolio.

Investors typically flock to investments that produce the best return from last year, last month and even last week when investing in stocks, cryptocurrencies or the latest IPO.

Over the decades, I have found that when presented with a choice of having a blue-chip portfolio or growth portfolio, over 90 per cent of investors choose growth because they believe they will make more money from this style of portfolio.

While it is logical to expect higher growth from this portfolio style, what most don’t consider is the volatility that a growth asset or portfolio is subjected to over time.

Growth investments have much larger swings in price than defensive assets and, as such, investors need to be able to handle this risk. Unfortunately, however, inexperienced investors tend to buy growth assets that have already risen through fear of missing out or they sell out too early for fear of losing.

Based on this behaviour, there are two lessons that can be learnt:

  1. the first is that you can’t buy yesterday’s returns because buying into something that has already risen strongly believing you will gain the same return in the future is a flawed strategy;
  2. secondly investors need to invest in assets that are congruent with their risk profile.

Let me say that risk is a far more important consideration than the return you will achieve when assessing an investment, which is why this should be every investor’s number one priority.

Right now, there are masses of inexperienced investors attempting to profit from Bitcoin believing it will achieve last year’s return in the next year. Of course, when it is rising, everyone is blissfully unaware of the risks. But once again, this thinking is flawed, as Bitcoin is a very volatile investment and when it does fall, it falls heavily.

Unfortunately, when Bitcoin does start to fall again, many will see how risky this investment really is, particularly the inexperienced. No doubt, those who have put their money in Bitcoin or other cryptocurrencies will come to regret their decision.

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.