The start of a new financial year is much more than just a date on the calendar—it’s an opportunity to assess and refine your financial strategy. One area that often goes overlooked but holds significant value is your investment risk profile. Whether you’re a seasoned investor or just starting out, ensuring your risk tolerance aligns with your financial goals is essential for long-term success.
This article will explore why reviewing your risk profile every financial year is critical, the impact of risk-return adjustments on your portfolio, and how new options like gearing investment funds can open up opportunities. By making informed decisions, you can strike the right balance between risk and reward while navigating the evolving financial landscape.
Why Your Risk Profile Matters
Your risk profile is the foundation of your investment strategy. It reflects your tolerance for financial risk, helping determine the types of investments that align with your objectives, time horizon, and emotional resilience to market fluctuations.
- Aligning Your Investments with Your Tolerance
Understanding your risk tolerance is critical for creating a portfolio you can commit to over the long term. If your investments are too aggressive for your comfort level, you might panic during market downturns and make impulsive decisions, potentially harming your financial progress. Conversely, if you’re overly conservative, you risk missing out on opportunities for growth.
By reviewing your risk profile, you can assess whether your current portfolio aligns with your ability and willingness to take risks. Key questions to ask include:
- Has your financial situation changed over the past year (e.g., a pay rise, retirement planning, or unexpected expenses)?
- Have your financial goals evolved, such as planning for a child’s education or an early retirement?
- How did you emotionally and financially handle market fluctuations during the past 12 months?
- The Impact of Life Stages on Risk Tolerance
Your financial goals and time horizon inevitably change as you progress through life, and so should your risk profile. For instance:
- Young investors often have a longer time to recover from market downturns, making them better suited for a portfolio with a higher percentage of growth assets like shares.
- Mid-career professionals may require a balanced approach, securing some returns while preparing for medium-term goals like property purchases or children’s education.
- Retirees or those nearing retirement are generally more risk-averse, prioritising capital preservation and steady income over ambitious growth.
Reviewing your risk profile each financial year ensures your investment strategy evolves alongside your life’s milestones.
Understanding Risk-Return Adjustments
Achieving the right balance between risk and potential return is a core aspect of successful investing. Failing to revisit this balance could leave you stuck in a strategy that no longer suits your objectives or market conditions.
- Revisiting Asset Allocation for Risk-Return Balance: The mix of assets in your portfolio—such as shares, bonds, property, and cash—determines your overall level of risk and return. Financial markets can shift significantly over a year, and failing to rebalance your portfolio annually might leave you overexposed to high-risk investments or underperforming assets.
- Considering Market Conditions and Emerging Opportunities: The financial landscape doesn’t remain static. Economic growth, inflation, interest rate changes, and geopolitical factors all influence market performance—and ultimately, your investments. Understanding how external conditions impact risk and return can help you adjust your portfolio for better outcomes.
Exploring New Investment Options Like Gearing
Gearing, or borrowing to invest, can amplify both the risks and rewards of your investment strategy. While it isn’t suitable for everyone, gearing can offer a valuable tool for investors looking to accelerate wealth creation—provided it’s used strategically and carefully.
Gearing involves using borrowed funds to invest, with the aim of generating returns that exceed the cost of borrowing. For example, you might take out a loan to purchase shares or property or increase exposure to a managed fund.
The primary benefit of gearing lies in magnified returns. If your investments perform well, the borrowed funds generate profits beyond your initial capital. However, gearing also comes with heightened risks, particularly during periods of market downturns, where losses can be magnified.
These gearing products can be effective for investors who:
- Have a high-risk tolerance and a long investment horizon, enabling them to ride out market fluctuations.
- Are seeking tax-effective strategies, as interest payments on investment loans may be deductible under Australian tax law.
Making Reviewing Your Risk Profile an Annual Ritual
Regular reviews of your risk profile don’t just improve your financial outcomes—they cultivate greater confidence and clarity in your decision-making. Here’s how to integrate this habit into your annual financial routine:
- Start with a Comprehensive Assessment: Use the new financial year as a checkpoint to reflect on your investment strategy, life changes, and financial goals. Practical tools like risk-tolerance questionnaires or portfolio performance reviews can provide valuable insights.
- Consult with Your Financial Adviser: Professional guidance is crucial in interpreting your risk profile and implementing effective adjustments. A financial adviser can also introduce emerging opportunities, such as geared funds, and help mitigate potential pitfalls.
- Set a Reminder for July Each Year: Use a calendar or financial planner to mark July as your time for reflection and alignment. A consistent annual review ensures no part of your portfolio is overlooked and strengthens your long-term financial security.
Concluding Thoughts
The beginning of a new financial year is your opportunity to recalibrate and refocus. Reviewing your risk profile ensures your investment strategy remains aligned with your tolerance for risk, lifestyle changes, and market conditions. By understanding risk-return adjustments and exploring advanced options such as gearing, you position yourself to make informed, confident financial decisions.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.