What is a Risk Profile?

Understanding how much risk you’re truly comfortable taking is one of the most important steps in building a successful investment strategy. Your risk profile shapes the types of investments you choose, how your portfolio reacts to market swings and ultimately how confidently you can pursue your financial goals.

Before investing it’s important to understand your risk tolerance and you may want to work with a financial advisor who can help find the right investments to align with those expectations.

Risk Profile Defined

A risk profile is primarily used to select and determine the proper asset allocation for an investor’s portfolio. Essentially, an investor’s risk profile helps identify the level of risk an investor is open to dealing with. An investor’s willingness to take on risk refers to their risk aversion.

For example, an investor may rather maintain the value of their portfolio. If they’re willing to forgo potential capital appreciation, they’re likely risk-averse. On the other hand, perhaps an investor seeks high returns. If they can tolerate market volatility, then they may be willing to take on more risk.

Often, investors evaluate their ability to take on risk by reviewing their assets. An individual with many assets but few liabilities may take on more risk. On the other hand, if an investor has a lot of liabilities and few assets, they may be more risk-averse. For example, if an investor has a retirement fund, emergency savings, no mortgage, and other investments, they may be willing to take on more risk so they can potentially reap greater rewards.

However, an investor’s willingness and ability don’t always match. Just because an investor has a substantial amount of assets and very few liabilities doesn’t mean they are willing to take on risk. They may prefer to maintain the value of their accounts and play it safe.

Risk Profile Considerations

You can create a risk profile in several ways. Investors often complete a risk profile questionnaire. They receive a profile score based on the answers they provide. Some questionnaire topics include age, major life changes, income, and investment comfort level.

In addition to financial questions, a questionnaire may inquire about how you handle potential losses. For example, a New York Life profile asks, “Due to a general market correction, one of your investments loses 14% of its value a short time after you buy it. What do you do?”

You could choose to sell this investment to avoid more loss or hold onto it and recuperate your loss. You may even decide to buy more stock since it is now selling at a lower price. While there is no right or wrong answer, you need to decide what’s best for you.

Your risk profile questionnaire is typically used by a set of financial advisors (or a robo-advisors) to help you design a well-diversified portfolio. Because an investor’s level of risk correlates to the asset allocation selected, it’s important that both align.

Types of Risk Profiles

There are three main categories of risk profiles. Each speaks to the level of risk an investor is comfortable undertaking. However, there are different levels within each profile that account for variables. It may be helpful to review the overall outline of the profile that most aligns with your desired risk.

Conservative: This means you want minimal volatility. Your ideal investments may offer protection with some kind of return. If you have a conservative risk profile, you may want to choose investments such as CDs or money market accounts where you will see very little volatility. Generally, your time horizon is low. Therefore, you’re unwilling to take on unnecessary risks.
Moderate: This is for people who want to earn a moderate to high return but don’t want to take on too much risk. If you’re a moderate investor you may choose a balanced portfolio strategy and have a moderate time horizon.
Aggressive: An aggressive portfolio seeks the highest return possible. An investor may have a longer time horizon and may be willing to stomach market volatility in many different economic conditions. Aggressive investors have usually experienced investors who understand the inner workings of the market and economy. They are not scared to invest in start-ups that may yield a high return. Some young investors may take more of an aggressive approach since they have a longer time horizon.

How to Determine Your Risk Profile

Understanding your risk profile starts with assessing your comfort level with market ups and downs. Some investors are willing to tolerate significant volatility in pursuit of higher returns, while others prefer a more stable approach, even if it means slower growth. Being honest about how you typically react during market swings can help you choose investments that align with your emotional comfort zone.

Your financial goals also play a major role in determining your risk profile. Short-term goals, like saving for a home in the next few years, usually call for more conservative investments, while long-term goals, such as retirement decades away, may allow for a higher level of risk. Clarifying your timeline helps you gauge how much fluctuation your portfolio can reasonably handle.

Another key factor is your financial situation, including your income, savings and ability to recover from potential losses. Investors with stable earnings and a strong emergency reserve often have a greater capacity for risk because short-term setbacks won’t derail their financial plans. On the other hand, if your budget is tight or you rely heavily on your investments for near-term needs, a more cautious approach may be appropriate.

Once you’ve considered these elements, a risk assessment questionnaire, often available through financial advisors or brokerage platforms, can help you pinpoint your exact profile. These tools combine your preferences, goals and financial capacity to categorize you as conservative, moderate or aggressive. Reviewing your risk profile regularly ensures your investment strategy continues to match your evolving needs and comfort level over time.

Bottom Line

Your investment strategy should be a combination of what you’re comfortable with contributing as well as what you’re willing to accept in return. If the idea of losing any money is scary to you, it’s likely you have a conservative risk profile. If you believe in trying to reach the highest return possible, even if it means you could lose money, you’ve got a more aggressive investment strategy.

Tips for Investing

Managing an investment portfolio requires thorough research, which can be time-consuming. Keeping up with the markets also requires background knowledge and it may be easier for professionals. A financial advisor can help you analyze the market and find the right investments for your risk preferences. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re low on cash but willing to take the risk on earning big with strategic investments, consider hiring a robo-advisor to help manage your account. Many have no or low opening balance minimums. They also tend to charge lower fees than other types of money managers. Despite the more affordable price point, some services still provide working sessions with human advisors.