Investing Risk Appetite Questionnaire

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Take our investing risk appetite questionnaire and discover how your attitude towards risk will influence your investing style.

Imagine for a moment: It is 2 am and you cannot get to sleep. You are being kept awake by a stubborn worry that will not leave you alone. Your fear is that the stock market may fall soon, taking a portion of your investment valuation with it.

Being kept awake by investment anxieties, is your brain is telling you that the level of risk you have taken is incompatible with your personal attitude to risk.

Investing is a journey that you will travel alone. The only person who will jump for joy when your portfolio rises, or cringe as it falls, is you. As the person who will have to ‘see it through’. It is important that you are comfortable with the investment decisions you make.

To avoid these mistakes, it makes sense to fully understand your thoughts and feelings about risk. You need to understand whether you have a deep-seated aversion to risk which may cause stress at a later date.

Investing Risk Appetite Questionnaire

We have designed a questionnaire to help you understand your attitude towards risk and investments.

Please answer the following questions truthfully and gain insights about your risk attitude and how this may affect your investing strategy below.

Results:

Take a look at all four investor risk profiles, and how they drive different investing approaches.

Risk Averse

Investing risk quiz - Risk Adverse

You view your savings as a reliable safety net. Moving away from risk-free investments would make you feel uncomfortable.as this would reduce this security.

You place value on a reliable interest income. You find it rewarding to calculate how your savings will grow over time. You treasure predictability even if this means losing out on potentially higher returns elsewhere. 

A loss of any part of your savings would be deeply regrettable and feel like a waste of money. Risky investments are a worry you frankly don’t need in your life.

Impact on investing strategy:

  • Favour bank accounts protected by the government deposit scheme (UK) or government bonds for guaranteed interest rates.
  • Switch accounts regularly to stay on market-leading interest rates. I recommend reading MoneySavingExpert’s up to date guide for a snapshot of the top accounts and any restrictions they may have.
  • May invest a small portion in high-quality corporate bonds to enhance rates of return and to increase your chance of keeping ahead of inflation.

Cautious Investor

Investment risk profile questionnaire - Cautious

You have grown irritated by tiny interest rates and have come to appreciate that better rates of return are available to those who look further afield.

This being said, you want to adopt a careful approach to investing and are particularly hesitant about buying shares with the memory of the most recent stock market crash. You have never imagined you would become someone who lost out in a market crash. You are prepared to accept lower returns if it means avoiding becoming one!

If you could receive a 2% premium over bank account interest rates, this will be a suitable reward for your research and acceptance of additional risk. This would satisfy you that your hard-earned money is finally doing something worthwhile.

Impact on investing strategy:

  • Give a higher weighting towards debt investments such as corporate bonds and peer to peer lending. Allocate a smaller proportion of funds invested in shares.
  • Your portfolio return is not likely to exceed 5% but this will protect from inflation whilst also providing some real growth.

Balanced Investor

Investment risk questionnaire - Balanced Investor

You see investments as a way to grow your wealth and you take a long term view when setting expectations. By focusing on the destination, you can accept the risk of capital losses in the short term.

When picking shares or funds, you would prefer to invest in well-managed companies in highly regulated countries. This helps to avoid violent volatility associated with political and economic turmoil in far-flung places.

You feel that your money should always be working at its hardest. You seek to limit the percentage of your portfolio in cash or bonds because of the downward drag they have on overall returns.

Impact on investing strategy:

  • Equities will be the core of the portfolio. Within equities, stick to large companies in developed economies, such as the UK, Europe, America and Japan.
  • Corporate bonds are included in the portfolio in a smaller quantity as a ‘stabiliser’ on returns.

Adventurous Investor

Investment risk tolerance quiz - Adventurous Investor

For you, the investing world is an exciting arena. Because of its lack of return. you lament holding cash in a ‘safe’ bank account.

You seek the maximum return possible and are prepared to stomach heavy volatility in the markets to earn it. You appreciate that booms and busts will occur and have the nerve to stay in the market when the going gets tough.

Getting access to all of your funds is not a priority and therefore you would be open to opportunities beyond the stock market to further diversify your portfolio. These could include property, private companies (including start-ups) and commodities.

Impact on investing strategy:

  • Shares in developed and developing countries should form the base of the portfolio.
  • Other higher-risk elements which provide returns with less correlation to shares, should be included, such as:
  • High yield corporate bonds (also known as ‘junk bonds’), property, hedge funds.
  • Some adventurous investors also invest in precious metals such as Gold, and collectables such as art and wine.

These preferences are only high-level indications because the attitude to risk is only one factor in deciding what portfolio is appropriate for you.

Other factors include your time horizon, your tax circumstances, your age, and any ethical concerns. All of these should be considered before investments are selected. Your money should be diversified across many different holdings. We will cover each of these in later Foundation or Intermediate articles.

Learning points summary – Investing Risk Appetite Questionnaire

  • An investment strategy should be wholly consistent with your personal objectives, your fear of loss and tolerance of risk.
  • We have provided a tool which indicates which of four risk profiles you may belong to.
  • People who are risk-averse should invest only small sums outside of government-protected investments.
  • Those who are willing some small risks will consider corporate bonds or other debt investments to receive a premium return.
  • Balanced investors will primarily use corporate bonds and shares to build a portfolio, but will limit the use of corporate bonds so that they act as a stabiliser rather than driving the average return.
  • Adventurous investors seek to find as many investments with high returns and different risks as these will complement each other in the portfolio.
  • These preferences are only high-level indications because your attitude to risk is only one factor in deciding what portfolio is appropriate for you.

Next article: What is an Investment Time Horizon and how does it Impact a Portfolio?


This article is part of the Foundation Learning Series provided by Financial Expert


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