Investor Risk Profile

If you have $100,000 cash to invest, should you buy 1 property for $100,000 with no mortgage or should you buy 4 properties with $25,000 down payment each and $75,000 mortgage on each property?

To answer this question, you first need to know your Investor Risk Profile. You discover your risk profile by analizing your risk appetite against these common factors among others.

1. Your age.
2. Your attitude towards risks.
3. Your emotions.
4. The speed of your financial plan.
5. Your financial skills and talent.
6. Your net income and net worth.
7. Your comfort level in managing your investments.
8. Your time available.
9. Your interest in the investment products.
10. Your level of financial education.
11. Social factors.

Your Age

The younger you are, the more risks you can afford to take. You have time on your side to ride out the short-term fluctuations on your investments. Therefore, it makes sense to buy 4 properties financed by $100,000 down payment and $300,000 mortgage.

If you are retired or nearing retirement, then you should play safe and buy 1 property with the $100,000 cash without any mortgage.

Your Attitude Towards Risks

Different people react differently towards risks. Some are risk averse while some are risk lovers and some are even die-hard gamblers. You should not take on any more risks than you are comfortable with.

Your Emotions

You should always aim to make your investment decisions based on facts and figures. However, in reality investing is an emotionally engaging process because your hard-earned money (and possibly your future) is at stake.

You should control your emotions and not get carried away because if you don't, then chances are higher you will make bad investment decisions. If you are a person who cannot control your emotions, then you should take less risks.

The Speed of Your Financial Plan

You will need to take on more risks if your plan is to make $200,000 in the next 3 years compared to someone else who plans to make $200,000 in 8 years. The faster the speed of your financial plan, the more risks you will have to take.

Your Financial Skills and Talent

If you have a talent for identifying economic trends in before the general public, then perhaps investing in the stock market would be more suitable for you. Generally investing in stock is perceived to be riskier than investing in properties. However, because of your rare talent, you are able to reduce the risks by selecting the right stocks.

Your own financial skills and talent play an important part in your investment strategy. An investment which is more risky to other people might be less risky to you.

Your Net Cashflow and Net Worth

The higher your net cashflow, the more risks you can afford to take. Net cashflow means excess cashflow after deducting all living expenses and financial obligations.

The higher your net worth, the more risks you can take. Your net worth (also know as equity) is the balance after deducting your debt and liabilities from your assets.

Your Comfort Level in Managing Your Investments

Every investment you purchase comes with your responsibility in managing it. Are you comfortable with managing 4 tenants, 4 mortgages, 4 repairs and maintenance among others? If not, then pershaps you should scale down to 2 or even 1 property.

Your Time Available

You should also consider the time you have available to manage your investments. The less time you have available, the less risks you should take.

For example, choosing to invest in properties instead of stocks. Reason being the property market is not as volatile as the stock market. When you invest in the stock market, you are competing against full-time professionals supported by the best, the latest and expensive tools and have access to the latest news.

Your Interest in the Investment Products

If you enjoy reading business magazines then you will naturally have an edge in stock investment. If you enjoy driving around the neighborhood and hunting for properties then you wil have an edge in property investment.

Your Level of Financial Education

Our financial education or knowledge could come from reading financial books, attending seminars or even by simply conversing with financially successful people. However, most of the times we obtain our financial education by learning from our investment mistakes. And some people don't even learn.

During years when interest rates is low, a person less financially educated may underestimate the risks and go ahead to buy 4 properties. However, another person who has lived through the years of high interest rates may decide to buy less properties in anticipation of high interest rates (and therefore high repayments) in the coming years ahead.

Social Factors

Are you single or married? Do you have children or parents who depend on you for financial support? If yes, then you should take less risks because any negative financial impact on your investments could affect these people besides you.

In summary, even though there are thousands of investment strategies available out there, you might not find one suitable for yourself. This is because we all have different risk appetite, different skills, different obligations. Therefore we have different risk profiles. The best investment strategy is the one you plan for yourself because only you know yourself best.