When it comes to investment, there is a reality that should not be forgotten: there is no solution that can combine good profitability with good security. However, you can choose between different investments whose returns vary according to their security level.
Thus, a safe investment is a risk-free investment that guarantees your capital. In this article, we will try to determine how your eagerness to take risks can meet your profit expectations.
Analyze your personal situation
An investor’s risk profile depends on their personal situation, their objectives when planning to invest, and how much risk they can agree to take.
Your objectives
In order to set up an investment strategy, you must first determine what you want to invest for and for how long: to prepare for your retirement, to prepare for your assets transfer, to get additional income or to grow wealth over the long term.
How much risk you agree to take
Risky investments have high returns, but they jeopardize your capital. They are also a source of stress in case of a crisis or financial markets fluctuations, and are not suitable for all profiles. This is the reason why, before making an investment, you need to determine your investor profile, which will help you assess the level of risk you are willing to take in relation to the profits you hope to make.
Determine your investor profile
Three different types of investors can be determined according to their risk tolerance: cautious, balanced and dynamic.
The cautious investor
Cautious investors seek to limit the risk they take; their objective is mostly to secure their capital. Their investment must be short term. Among those safe investments, precautionary and regulated savings accounts are loved by the French, but their interest rate is very low: Livret A, LDDS, PEL, etc. Time-deposit accounts are also risk-free investment solutions.
Cautious investors can turn to euro funds. These investment media are characteristic of life insurance contracts whose capital is guaranteed by insurance companies. However, despite their risk aversion, they may be tempted to boost their investment by allocating a small percentage of their portfolio to different types of assets that are a little riskier, such as SCPI shares, bonds or even a few stocks.
The part of high-risk assets in the cautious investor’s portfolio can reach
- 10% within 2 years from retirement
- 20% between 2 and 5 years
- 40% between 5 and 10 years
- 70% if you are far from retiring.
The balanced investor
Balanced investors are seeking the right equilibrium between risk and return; they agree to take risks to preserve their portfolio in the medium and long term. The allocation is also balanced; it can contain 50% in investments without capital loss with life insurance contracts in euros, and 50% with riskier financial products: shares, share-linked life insurance, SCPIs or OPCVMs (Organismes de Placement Collectif en Valeurs Mobilières – Undertakings for Collective Investment in Transferable Securities – : SICAV and FCP).
The part of high-risk assets in the balanced investor’s portfolio can reach:
- 30% within 2 years from retirement,
- 50% between 2 and 5 years,
- 80% between 5 and 10 years.
The dynamic investor
Dynamic investors choose an offensive investment strategy and agree to taking significant risk for a high return over the long term. Their portfolio may contain up to 80% of risky products whose capital is not guaranteed; for example, OPCIs (Organismes de Placement en Immobilier – real estate investment organizations), SCPIs – especially those operating on real estate markets abroad – and they can also invest in the stock market and hold shares that combine their dividend and their capital gain.
The part of high-risk assets in the dynamic investor’s portfolio can reach:
- 50% within 2 years from retirement,
- 70% between 2 and 5 years from retirement.
How to find about an asset’s risk
The DICI and the DIC
Before you commit to a fund, the financial intermediary must provide you with an information document containing all the necessary information with the associated risks. This document is a legal obligation and is standardized in Europe; it allows you to make an informed decision.
For OPCVMs (UCITS), the risk/return features of each fund are set in the DICI – document d’information clé pour l’investisseur (key investor information document).
For SCPIs or share-linked life insurance contracts, you will find information on risk in the DIC – document d’information clé (the key information document).
The risk indicator
The DICI and the DIC both comprise a graduated scale going from 1 to 7 on which the fund’s risk and return indicator can be read. The stated figure corresponds to an estimate level.
This level expresses the fund’s fluctuation trend, its extent either upward or downward, and it also makes it possible to compare its level of risk with other products.
Its calculation takes into account several of the fund’s characteristics, including its volatility over the past five years. Low-risk assets are level 3 or below; level 7 is the highest risk.
Finally, as far as each DICI or DIC is concerned, it must be remembered that “past performance is not indicative of future performance”, which means that this indicator is based on past results that may not be repeated in the future and does not constitute a guarantee of future performance.