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!
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"):
After answering all 7 questions, add up your points.
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.
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".
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.
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.
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.