So you've created an account with Mercer Invest Wise and now you're wondering if we've put you in the right portfolio. In fact, how does a risk assessment questionnaire or a financial professional decide what risk profile is best suited for you? Read on to understand how stock markets generally move, what risk really means, and how we assess your risk profile.
So what does risk really mean?
Let's dig into what risk actually means. Since nobody can control market movements (or returns for that matter), Mercer Invest Wise focuses on controlling the level of risk you should expose yourself to. Risk (or Volatility as we call it in the financial industry) is simply a measure of how much your investments will fluctuate depending on how markets move. If you take on more risk and markets rise, you're likely to have higher gains. But if you take on more risk and markets fall, you're likely to have larger losses. In other words, taking more risk will make your account more volatile. If you take on lower levels of risk, your investments will gain less or lose less if markets rise or fall, respectively. So taking lower risks leads to less volatility, or more stability.
In general, controlling risk is done through asset allocation, which is a fancy term that simply refers to how much of your money is in stocks (i.e. equities) versus how much is in bonds (i.e. fixed income). Stocks (or shares in companies) have historically generated greater returns over the long term than bonds but have also been the main contributor of higher fluctuations. On the other hand, fixed income securities or bonds provide a steady (although lower) source of interest income. They experience much smaller fluctuations than equities.
To put it simply, having more equities in your portfolio leads to higher risk (or fluctuations) but better long-term growth potential. Having more bonds or fixed income in your portfolio provides better short-term stability but reduces the long-term growth potential of your portfolio.
How does Mercer Invest Wise assess my risk?
Using a combination of your objectives, your investment time horizon, your level of income, your net worth, your investment knowledge, your past investment experience, and your personal tolerance to risk, Mercer Invest Wise is able to assess how much risk (or potential fluctuations) your investments should be subject to.
Now for the million dollar question: