Risk tolerance or risk profile

The financial advisor is learning how conservatively or aggressively you would like to invest. But actually, a risk profile signifies more than that. Financial advisors often use a few model portfolios which they adapt for the unique needs of each client. Your risk profile indicates which of these model portfolios might become a good basis for your own, custom portfolio.

Investors are usually categorized as "conservative", "moderate" or "aggressive", with in-between categories of "moderately aggressive" and "moderately conservative" also applicable based on questionnaire responses. 

If you absolutely do not want to risk losing money, and if your first priority is consistent income to live on, you are a conservative investor. If these are your concerns and you are retired or about to retire, you should not be offered high-risk investments. If you retire with an aggressive portfolio and your investments tank, it could take many years to rebuild your savings. However, many pre-retirees and new retirees are moderately conservative: they are cautious with money in their lives and don't want to take on a risky portfolio, but they still have a need to accumulate assets because they have either started saving for the future too late or lost assets as a result of market downturns or unfortunate financial decisions.

Aggressive and moderately aggressive investors commonly want to match or beat the stock markets, or save for retirement at a highly accelerated rate. Most of them expect to build substantial wealth someday; most of them are young or in the middle stage of life; most of them have NOT been hit hard financially as a result of investing, and many of them have substantial income or savings. The moderately aggressive investor is willing to wait a bit longer to reach his or her goals, while the aggressive investor tends to be in a hurry by comparison.

Typically, the moderate investor starts investing roughly about the time of major life events. Often, the moderate investor is a younger investor saving or investing for long-term goals (usually their child's college education and retirement). These midlife investors frequently have a "balanced" portfolio, with a mix of conservative and riskier investments across varied investment classes. The portfolios of moderate investors are often fine-tuned or revised to become more conservative as they age. These investors are willing to accept some losses and risks and usually educated about the realities of investing and their investment options. Some moderate investors are retired or nearly retired, having either retained their investment stance out of necessity.

Risk tolerance is very important why because, Decades ago, you used to hear "horror stories" about seniors losing their life savings as a result of inappropriate investments. It is a very important factor not only in terms of investing, but in terms of the client-advisor relationship. If you'd like to learn more about different investment styles or you feel you might be taking on too much risk as you invest, I would urge you to speak with a qualified financial advisor.