Investor profile – drawing up the blueprint for your portfolio

There are many ways to invest in financial markets. The right approach will depend on your individual needs and long-term financial aspirations, and the financial and other resources available to you. Your adviser will bring these various elements together in your investor profile, which will serve as a foundation and guide to build your portfolio.

Your investor profile is all about determining the right balance of risk and reward. Different investments have varying risk and reward characteristics – from emerging market or technology-focused stock market investments to low-risk bonds issued by governments and big corporations. Some investments will seek to generate an income, while others are geared more towards long-term capital growth.

Before considering the pros and cons of different investment, you should undertake an honest appraisal of your ability and willingness to take on risk, your time horizon, lifestyle and resources, and the scale of returns you are hoping to achieve.

In part this might be determined by the stage of life you are at: are you a young professional investing for the long-term prospect of retirement, or are you on the cusp of ending your professional career? This will influence how long you have to invest and how much risk you can take, but your investor profile will also be shaped by your personality, aspirations and your understanding of financial markets.

Your investor profile might be determined in part by your stage of life, which influences how long you have to invest and how much risk you can tolerate, but also by your personality and understanding of financial markets.

There are four main areas to consider.

Your investment objectives

This is what you want your money to do for you. Are you saving for your retirement, your children’s education expenses, or a shorter-term goal, such as the purchase of property? This will affect how long you have to invest, whether you can tolerate short-term fluctuations in your capital, and whether you need an income from your investments.

Your investment horizon is the length of time over which your portfolio will remain invested. If you are in your 20s and plan to retire in your 60s, the priority will be to see your portfolio grow as much as possible. The biggest risk may be that your portfolio does not keep pace with inflation. However, you have plenty of time to ride out stock market volatility. In this scenario, your portfolio could hold a larger proportion of riskier assets such as equities.

However, if you need the capital in five years or less, you may well be advised to stick to lower-risk assets such as government bonds issues by developed countries, higher-quality corporate bonds, and the shares of the most consistently solid and well-performing companies.

Your risk aversion

This is about your willingness to accept risks and short-term fluctuations in the value of your portfolio. This will largely be a function of your investment horizon and how much you have to invest, but it will also be influenced by your personality and the degree of risk taking with which you are generally comfortable.

Your bank is legally obliged to determine your risk profile before giving you investment advice, but it is also important that you understand exactly what is meant by risk tolerance. Even if this is what your bank will focus on most, risk in investing is not simply an objective concept related to how you position yourself in the face of the sometimes unpredictable fluctuations of the markets. Risk also has a subjective dimension and must be defined in relation to the investor’s deeper aspirations and life path.

Risk also has a subjective dimension and must be defined in relation to the investor’s deeper aspirations and life path.

Your understanding of financial instruments

Knowledge tends to build confidence. If you are familiar with stock market investing and have observed a few boom-and-bust cycles, you will understand that markets go up and down, but sooner or later they tend to almost always recover. However, stock market turbulence that may result in a plunge in the value of savings, even briefly, can be destabilising to those who aren’t used to it.

It can be worth familiarising yourself with the basics of investing. It is worth developing your ability to understand and assess the financial instruments proposed to you. If you need more explanation about a financial instrument, do not hesitate to request support from your Relationship manager.

Your financial capacity

The final consideration that should help shape your risk profile are your sources of income, any financial commitments that you may have, and how much spare capital you have available to set aside.

If you have little resources, this will constrain your ability to take on risk. Those with plenty of wealth to fall back on can take on greater risk because any losses are unlikely to have as big an impact. With this in mind, an analysis of your investor profile will need to include an estimate of the value of your assets, and how much you can save toward your goals.

Since 2022, financial intermediaries including banks have been required by the EU’s MiFID legislation to incorporate sustainability preferences into a client’s investor profile.

How does sustainability fit in?

Since August 2022, EU banks have been required by the EU’s MiFID legislation to incorporate sustainability preferences into a client’s investor profile.

The questions this involves may look complex to the uninitiated. They are designed to capture not just your interest in sustainability-related investments, but your priorities. Are you interested in an investment portfolio that is aligned with the EU’s green taxonomy classification system for sustainable activities, for example? Are you more inclined to products that invest in economic activities which contribute to environmental and/or social objectives whilst ensuring they do not significantly harm other objectives, also known as “sustainable investments” according to SFDR? Or would you like to invest in products that limit adverse impacts on ESG criteria, meaning that take Principal Adverse Impacts into account?

The investor profile will also examine whether your Sustainability Preferences are more oriented to certain factor(s) or not and precise whether your interest is more for Environmental factors (example: climate change and biodiversity), Social factors (example: human rights, labour standards and diversity) or Governance factors (example: bribery, corruption and board composition).

In order to have additional information on the section ‘Sustainability Preferences’ of your investor profile, you can refer to the document “how does BIL assess my sustainability preferences and define my sustainability profile?” as an example.

Bringing differing assets together into an investment strategy

Your investor profile will be mapped onto an investment strategy designed to help you achieve your investment objectives. There are a range of broad portfolio types. Defensive portfolios, for example, aim to protect your capital, implying a cautious investor profile and a priority on minimising fluctuations in the value of your savings. This may constrain your returns over time, but suits a shorter investment horizon of between two and four years.

A lower-risk portfolio incorporates riskier assets and is intended for investors looking for a slightly higher return, willing to sacrifice some comfort for a small part of their capital. This approach, which means not overreacting to temporary price dips, suits an investment horizon of three to five years.

Medium- and higher-risk portfolios each incorporate assets with higher volatility and suit a longer time horizon – up to 10 years in the case of the most aggressive portfolios.

But everything starts with your investor profile, the blueprint for your whole investment strategy. Your adviser will spend time getting it right to ensure your envisaged investment outcomes most closely match your plans and ambitions.