According to the Consumer Financial Protection Bureau, the meaning of financial well-being consists of four important factors:
- Having control over your day-to-day, month-to-month finances
- Being able to weather a financial shock
- Being on track to meet financial goals
- Having the financial freedom to enjoy your life
The path to financial well-being is different for everyone but having a strong grasp of the fundamentals and a focus on these four factors will improve your understanding of your personal risk profile and guide your decisions to be prepared for retirement. It’s important to determine your personal risk profile, as it determines your willingness and capacity to take on risk with your financial assets.
A simple way to determine your personal risk profile is to check out SKG's Personal Risk Profile Questionnaire, a series of seven questions that help determine your personal risk profile at this moment. Below, is the list of profiles based on scores, but for now, it’s good to understand each profile designation. Visit the Questionnaire at your convenience.
Conservative (7-18 points): There is a need for some growth potential to help you stay ahead of inflation, but you may be happier with a conservative portfolio
Moderate (19-26 points): Although you understand the inevitability of risk, you may prefer a more moderate investment mix.
Growth (27-31 points): You’re comfortable with risk yet have some reservations. A more balanced portfolio, with a little extra risk might be right for you.
Aggressive Growth (32-35): It’s clear you’re comfortable with risk, but you might consider tempering your portfolio with investments that can provide stability.
Let’s go over the different options for asset allocation for each profile (Conservative, Moderate, Growth & Aggressive Growth) Asset allocation is how you divide your money among different asset classes and for the purposes of this exercise, let’s only discuss three main asset classes: bonds, cash/cash equivalents and stocks, also known as equities.
Conservative (7-18 points)
Generally, a conservative investment profile seeks to preserve money with the least amount of risk. Examples of these types of investments may include cash and cash equivalents – such as savings accounts and CDs, municipal and government bonds, and some insurance products, such as certain fixed-income annuities.
Moderate (19-26 points)
A moderate investment profile often will have a higher level of risk exposure – in return for growth – but still seeks to maintain a level of principal preservation. Examples of moderate investments may include some municipal and corporate bonds, real estate, and certain types of equities, such as income stocks.
Growth (27-31 points)
A growth investment profile will have a higher level of risk yet maintaining some level of stability. Examples of growth investments may include some municipal and corporate bonds, and certain types of equities, such as stocks, that have capital appreciation as their goal.
Aggressive Growth (32-35 points)
An aggressive growth investment profile carries the most risk – and, potentially, the most opportunity for reward. Examples of aggressive investments may include certain equities – such as certain growth and value stocks, both domestic and international. Aggressive investments also include commodities and other speculative investments.
See part 2 of this blog to explore how your profile can be affected by other factors in your life.
*These categories of investing styles are offered based on the results of the questionnaire and are simply a suggestion for consideration. This material is not intended to replace the guidance of a qualified financial professional.