Take the Quiz
Your risk tolerance has a huge impact on the investing strategies that will work for you.
Try to be too aggressive, and you'll stay awake at night worrying about your money. If you're too conservative, you may get impatient and take unnecessary risks.
The following risk tolerance quiz to help you get started. Learning more about your preferences is a must if you're going to be a successful investor.
Good News - No Wrong Answers!
The following questions are a short example of the questionnaire a financial planner or broker will use to estimate your risk tolerance.
Q1) You plan on using the money you are investing:
1 point - Within 6 months
2 points - Within 36 months
3 points - Sometime in the next 3 to 6 years
4 points - 7 or more years from now
Q2) The total balance of all your investing accounts is ____% of your net worth (excluding my home, acquisitions, and other "doodads"):
1 point - is more than 75%
Q3) You expect your future income:
2 points - is between 75% and 50%
3 points - is between 50% and 25%
4 points - is less than 25%
1 point - to go down
Q4) You have an emergency fund:
2 points - to remain the same or grow with inflation
3 points - to grow faster than inflation
4 points - to grow quickly
1 point - for less than 3 months of expenses
Q5) You would risk ___% of your total investing balance for a ___% chance of doubling your money
2 points - for less than 6 months of expenses
3 points - for less than 9 months of expenses
4 points - for more than 1 year of expenses
1 point - 0
Q6) With regard to your investing experience:
2 points - 10
3 points - 25
4 points - 50
1 point - You are new to investing
Q7) The main reason I want to open an investing account:
2 points - You invested in stocks and bonds and did not feel comfortable
3 points - You have some limited experience investing in stocks, bonds, mutual funds, and etfs
4 points - You have been diligently investing for more than 5 years
1 point - is to preserve my money
2 points - is to create income, then generate growth
3 points - is to generate growth, then create income
4 points - is to generate growth as quickly as possible
After answering all 7 questions, add up your points.
Total scores are broken down into four categories:
28 - 25 points = You are aggressive
24 - 20 points = You are moderate
15 - 19 points = You are conservative
14 - 04 points = You are ultra conservative
Your Risk Tolerance
Your risk tolerance show you your feelings towards risk, volatility, and variability of returns (both positive AND negative).
Just as long-term success requires the use of different methods at different times, your investor type can be different for different trading accounts and can even change as you achieve personal financial goals.
Don't fall for the all or nothing approach.
An aggressive investor is willing to commit a large portion of their net worth into different investing strategies and instruments.
This investor type has a high risk tolerance, because they are willing to put a large portion of their net worth at risk of loss in exchange for the chance of high returns.
In addition, an aggressive investor is comfortable with a high level of volatility. This means that they will tolerate large losses (15%+), in their attempts to generate large profits (15%+).
Typically, aggressive investors use investing strategies and tactics associated with speculation. You'll often hear them say things like "no risk, no reward".
A moderate risk tolerance is exactly what it sounds like. These investors are willing to risk a fairly large portion of their net worth on investments.
However, a moderate investor is NOT comfortable with a high level of volatility. This investor type will tolerate medium losses (~10%), in their attempts to generate large profits (~10%).
Generally speaking, moderate investors use a large number of growth and income strategies when making investments.
They will also use some preservation of capital techniques for certain accounts (such as emergency savings), but limit speculation to 5% or less of their total portfolio size.
Conservative investors want some growth, but are not willing to put a large amount of money at risk. This type of investor focuses on reducing volatility.
Therefore, investors with this risk tolerance tend to select investments and strategies that have long track records of good performance, with as little variation as possible, year to year (e.g. utility companies).
This means that they will tolerate small losses (<5%) in their attempts to generate large profits (>5%).
Income and preservation of capital strategies tend to be favored by conservative investors. They may have some portion of their portfolio in growth strategies.
The ultra conservative investor is focused on getting the absolute lowest volatility in their investing returns. These investors choose instruments and strategies that offer "guaranteed" results (Investing in Certificates of Deposit
, for example).
They accept the fact that guaranteed returns are low compared to other investments (sometimes even lower than inflation) in exchange for the knowledge (security) that the returns are predictable and fixed.
This means that as long as they do not lose, any return is okay (0%-5%).
This investor type has no stomach for volatility. They are solely focused on preservation of capital strategies and avoiding loss.