How does Sygnia determine my risk profile?
Since nobody can control market movements (or returns for that matter), Sygnia focuses on controlling the level of risk you should expose yourself to. Using a combination of your objectives, investment time horizon, income, net worth, investment knowledge, past investment experience, and personal tolerance to risk, Sygnia is able to assess how much risk your investments should take on.
So what is risk?
The most common measure of risk in the financial industry is measured by Volatility. This is simply a measure of how much your investments are expected to 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 financial industry term that simply refers to how much of your money is in local or international stocks (i.e. equities) versus how much is in local or international 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 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.