What is Your Risk Tolerance?

2006-08-23

In everyday life we all have different tolerances for risk. Some choose to hang glide or bungie jump, while others fear standing on a step ladder. Well the same holds true for our risk tolerance in our financial lives. Here is a simple risk tolerance test you can take.

Grab a notepad and answer the following questions as honestly as possible using the scale below.

1 = strongly disagree
2 = disagree
3 = neutral
4 = agree
5 = strongly agree

1. Expected return: Given historical returns on different kinds of investments, I desire an above-average rate of return on my investments.

2. Risk tolerance: I am willing to accept an above average level of investment risk and can accept occasional years of negative return on my investments.

3. Holding period: I am willing to hold my investments for 10 or more years.

4. Liquidity: I do not need the ability to convert my investments into cash and have adequate net worth to meet short term financial obligations.

5. Ease of management: I desire to be actively involved in the monitoring and decision making process when it comes to managing my investments.

6. Dependents: There are none to very few people who rely on me and my income and investment portfolio performance for financial support.

7. Income source: My main source of income is steady, adequate, and growing.

8. Insurance coverage: I maintain adequate life and health insurance coverage.

9. Investment experience: I have prior knowledge of investment experience and understand the concept of investment risk.

10. Debt and credit: My debt level is under control and I have an excellent credit history.

Now add up your answers for questions 1-10 and divide your answer by 10. The higher your number is the greater your risk tolerance is.

For example if your answer is:

1-2 : You have a low risk tolerance and should look for safe investment options like CDs, money market accounts, etc.

2-3: You have a low to neutral level of risk tolerance and can afford to place some of your investments into stocks, mutual funds, etc. Probably around 25% or so.

3-4: You have a moderate risk level and should look to put your investments about 50-70% stocks and mutual funds, with the remaining in short-term safe investments.

4-5: You have a high risk tolerance and love to gamble. You look for maximum returns an can afford periods of loss. Growth funds, start-ups, etc will probably make up around 30% of your portfolio.

Related Articles:
» Dealing with Investment Risk
» Results From Investing Without All The Risk
» A Scientific Look At Making Bad Investments

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