When a wealth plan is made, the first step is to assess your capacity for undertaking financial risk. The capacity for risk depends on your responsibilities, objectives, personality and many other variables. The risk profile is an individual’s ability to assume financial risk as part of his/her investment portfolio. The reward in assuming higher risks lies in the possibility of generating higher returns. However, your ability and willingness to take financial risks depends directly on you and your environment.
Deciding how much risk is good and how much risk is bad, depends primarily on your impending responsibilities and feasibility of lifestyle. It is gauged by factors such as demographics such as age, life stage and socio economic profile attributes such as habits and lifestyle.
Though two individuals may have similar risk profiles, they may still differ in their attitudes to risk taking activities. Your attitude to risk is an extension of your personality and like any other form of self-analysis this too requires you to assess yourself with complete honesty to make informed decisions.
