If you want to invest money successfully in the long term, you should first know your personal risk profile. It shows how much risk you can bear and which forms of investment suit your own investment horizon and individual risk tolerance.
• Risk tolerance and investment horizon determine investments
• Diversification across different asset classes, regions and maturities reduces fluctuations
• Investments such as government bonds, fixed-term deposits or overnight money offer stability – at the expense of returns
Anyone who wants to invest money successfully in the long term should first know how much risk he or she can actually bear. A personal risk profile not only shows your own willingness to take risks, but also helps you choose the right forms of investment for your own investment horizon. Those who know their profile make smarter decisions, avoid mistakes and keep a cool head even in turbulent market phases.
Why a risk profile is important
Every investor reacts differently to price fluctuations. While some people endure larger losses calmly, others become stressed even after smaller setbacks. A risk profile provides guidance and shows how much risk investors are willing to take. This helps prevent hasty decisions, such as panic selling or excessive risk-taking, that could cause long-term harm.
Consider personal factors
In addition to willingness to take risks, financial conditions also play a role. How much assets are available, what current obligations exist, and are there emergency reserves? The investment horizon is also crucial: If you don’t plan to retire until 20 years from now, you can ride out short-term fluctuations more easily than someone who wants to finance a property in a few years.
Willingness to take risks and the emotional component
It’s not just facts and figures that count – your personal attitude to losses is also crucial. If you get nervous about small fluctuations, it’s better to invest in safe investments. However, if you are willing to accept temporary losses, you can take advantage of opportunities in growth-oriented investments.
Risky investments
More risky investments include individual stocks, REITs (real estate stocks), low-rated corporate bonds, low-rated government bonds, cryptocurrencies and P2P loans. Although they offer high chances of winning, they can also entail strong price fluctuations or risk of default – ideal for investors who can tolerate fluctuations calmly.
Moderately risky investments
Stock ETFs and stock index funds are considered moderately risky because they already offer a certain level of diversification. Your risk depends on the composition of the fund, the industry distribution and regional diversification. This diversification allows losses of individual positions to be cushioned while investors can continue to benefit from long-term growth.
Less risky investments
The more secure investments include high-quality government bonds from countries with the best credit ratings, fixed-term deposits and current account accounts up to 100,000 euros in countries with the best credit ratings, and cash. These investments protect against price fluctuations and offer stability. The disadvantage: In the current phase of low interest rates, the returns are low and are often barely above inflation. Anyone who chooses security must therefore weigh up the fact that they are foregoing higher profit opportunities in return.
Diversification to minimize risk
For some investors – depending on their risk profile – it may well be worthwhile to only stock up on high-risk or moderately risky investments. Meanwhile, market participants who are more anxious are more likely to find what they are looking for in the class of less risky investments.
Meanwhile, if you want return and risk to be more or less balanced, a broad diversification of investments is a good idea, as this is the key to a stable portfolio. Fluctuations can be balanced out by combining risky, moderately risky and safe investments across different asset classes, sectors, regions and maturities. Losses in one area can be mitigated by gains or stability in other areas. A well-diversified portfolio of individual stocks, ETFs, REITs, corporate and government bonds not only protects against strong fluctuations, but also enables potential returns. Regular adjustment of the weighting ensures that the portfolio permanently matches your personal risk tolerance – which can change over time.
The risk profile as a guide
A risk profile is not a rigid construct. Changes in life – such as changing jobs, starting a family or making major purchases – can change your willingness to take risks and your investment horizon. If you know your profile, diversify your portfolio broadly and check it regularly, you will lay the foundation for long-term successful and stress-resistant investments.
Claudia Stephan, editorial team at finanzen.net
Image sources: Robert Kneschke / Shutterstock.com, Sergey Nivens / Shutterstock.com
