Anyone who's invested in the market for even a short time likely has heard the term 'risk tolerance.' When applied to a stock-and-bond portfolio, risk tolerance refers to an investor's ability to handle fluctuations in the market. If you're a risk-averse investor, you may feel more comfortable with a portfolio that emphasizes bonds and other fixed-income investments, which tend to be less volatile than stocks. On the other hand, if you're willing to take on more risk, you may prefer a portfolio that emphasizes stocks, which have the potential for higher returns over the long term.
But how do you know what your risk tolerance is? The truth is, it's not always easy to determine. Some people may think they're comfortable with risk until they see their portfolio drop in value, while others may be more comfortable with risk than they realize.
That's where this quiz comes in. By answering the questions below, you'll get a better sense of your risk tolerance and be better equipped to make investment decisions that align with your goals and comfort level.
- How would you feel if the stock market experienced a 20% decline in one month?
a. I would panic and sell all of my investments.
b. I would be very worried, but I would hold onto my investments.
c. I would be concerned, but I would stay the course.
d. I would view it as a buying opportunity.
2. How long do you plan to hold onto your investments?
a. Less than a year.
b. One to three years.
c. Three to five years.
d. More than five years.
3. How much of your investment portfolio are you comfortable putting into stocks?
a. None.
b. Less than 25%.
c. Between 25% and 50%.
d. More than 50%.
4. Which of these investments would you be most comfortable with?
a. U.S. Treasury bonds.
b. Corporate bonds.
c. Large-cap stocks.
d. Small-cap stocks.
5. How important is it to you to have steady, predictable returns?
a. Very important.
b. Somewhat important.
c. Not very important.
d. Not at all important.
6. How important is it to you to beat the market?
a. Very important.
b. Somewhat important.
c. Not very important.
d. Not at all important.
7. How much of your portfolio are you comfortable losing in a single year?
a. None.
b. Less than 5%.
c. Between 5% and 10%.
d. More than 10%.
8. What is your primary investment goal?
a. Preservation of capital.
b. Income generation.
c. Capital appreciation.
d. Speculation.
9. How important is it to you to keep up with inflation?
a. Very important.
b. Somewhat important.
c. Not very important.
d. Not at all important.
10. What is your current income level?
a. Less than $50,000.
b. Between $50,000 and $100,000.
c. Between $100,000 and $200,000.
d. More than $200,000.
11. How much investment experience do you have?
a. None.
b. Less than one year.
c. One to five years.
d. More than five years.
12. How important is it to you to have a diversified portfolio?
a. Very important.
b. Somewhat important.
c. Not very important.
d. Not at all important.
13. How important is it to you to invest in socially responsible companies?
a. Very important.
b. Somewhat important.
c. Not very important.
d. Not at all important.
14. How much of your investment decisions are based on emotion?
a. All of them.
b. Most of them.
c. Some of them.
d. None of them.
Now that you've answered the questions, it's time to tally up your score. Give yourself one point for each a answer, two points for each b answer, three points for each c answer, and four points for each d answer. Then, add up your score and consult the chart below to determine your risk tolerance.
Less than 20 points: Conservative investor. You prefer investments that are low-risk and offer steady returns.
20-30 points: Moderate investor. You're willing to take on some risk in exchange for higher potential returns.
31-40 points: Aggressive investor. You're comfortable with a significant amount of risk and are willing to accept the possibility of large losses in exchange for the potential for large gains.
It's important to note that your risk tolerance may change over time. For example, if you're approaching retirement, you may want to shift your portfolio toward less risk investments. On the other hand, if you're still in your 20s or 30s, you may be comfortable with a more aggressive portfolio.
Ultimately, the key is to invest in a way that aligns with your goals and comfort level. By taking the time to assess your risk tolerance, you'll be better equipped to make investment decisions that are right for you.
