Financial Blog: What’s Your Risk Tolerance?

One of my main tasks as a financial planner is to help people figure out not only their goals and the reasonable risks they need to incur to reach those goals, but also their risk tolerance: the risk that they can’t take risk. All the formulas in the world are useless if you’re filled with dread each day over what’s happening—or not happening—with your money. That’s why this inquiry is critical before delving into the numerics of the game plan. Think of it as the calisthenics an athlete does before the actual game begins.

To help you figure out your risk tolerance, I’ve presented a list of questions very similar to the ones I pose to my clients. I use these questions to help clients design an investment strategy that they can stick with. If they’re risk-averse investors, I don’t want them to get too uncomfortable on the downside. If they’re risk takers, I don’t want them to get too antsy about missing upside. Why the customized tweaking? Because if either extreme happens, the investor will bolt from the plan. And that’s where trouble happens.

As you take this quiz, don’t try to pick the “right” answer. Try to be honest with yourself based on how you’ve acted in the past, or how you think you’d act in the future if you’ve already had some experience. That’s the only way you’ll be able to create a game plan that will work for you.

Before you begin, think broadly for a bit about how you would describe your ability to handle investment risk. Try to draw up, mentally or on paper, a descriptive statement. For example, “I can’t handle losing money. The ups and downs of the market really bother me.” Or “I know I have to take some risk, but I would consider myself a pretty conservative investor.” Or “I get the idea of long-term investing and can’t even be bothered paying attention day to day.”
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What’s Your Risk Tolerance?

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