Investing is often advised and even marketed as the best way to grow your wealth. “Make your money work for you!” so to say. Before we go around actually investing our money, we usually do a bit of research. Questions like “What should I invest in?” crop up very often. Different types of investments will have different risks and rewards. Which type you go for depends on your risk appetite! There are different types of quizzes you can take online to help determine what kind of a risk taker you might be. But these (including the one I have here) are usually just a simple guide and not to be taken as some sort of all-seeing eye.
What IS a risk appetite anyway?
You know how people have an appetite for different kinds of foods like spicy or desserts? Well, when it comes to risk, there’s an appetite too! For example, I’m pretty risk adverse when it comes attractions like rollercoasters and zip lines across the canyon. But I’m pretty aggressive when it comes to financial risk. Actually, I may only be slightly more aggressive than “balanced” people.
Regardless, knowing your risk appetite (also known as risk tolerance) will be very useful when it comes to determining what investments can suit your needs. If you’re a compulsive risk taker, you would probably be more suited for volatile markets for a chance of higher rewards. If on the other hand you’re more timid (and there’s nothing wrong with that), you would probably opt for safer bets like bonds or income-based investment plans.
Find out your risk appetite
You’re in luck! I was able to put together this little questionnaire that can help you find out your attitude towards investing. This quiz works best when you read the answers properly and think about it. Pro-tip: the first one you pick in your mind, go for it. Don’t second guess yourself with “maybe this is better” because the first impression would reflect your immediate state of mind.
It should be embedded here, but if it has problems loading, you can [Find the quiz here]. Have fun!
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What does your result mean?
There are 4 possible “results” here:
- Risk Adverse
These are reflected from the answers you gave on your attitude towards risk and certain scenarios. They are not, by all means, 100% accurate or even they were, your circumstances may change in the future and alter the results! The main effect this result has on you is pretty much how you should allocate your assets into equities (e.g. stocks) and fixed income securities (e.g. bonds).
1. Adventurous a.k.a. Aggressive
An aggressive investor is usually more confident in taking risks in investing because they’re either reckless, or they have done their homework. Understanding the financial markets and the forces at play really helps in building your tolerance because you can take calculated risks as opposed to simply gambling.
These kinds of investors usually look to maximise returns and are willing on taking a higher risk if the results are favourable. A rule of thumb I’ve seen before is 70-90% equities and 10-30% fixed income securities in the portfolio.
2. Balanced/Cautious a.k.a. Moderate
Moderate risk tolerance means the investor understands that there are risks involved and are willing to sacrifice some returns if it means taking on less risk. I’ve combined 2 results into 1 tolerance level because the difference is simply how much you’d like to risk. A little less, you’re Cautious and a bit more, you’re more Balanced. Regardless, if you’re not aggressive nor conservative, you’ll be moderate a.k.a. slightly conservative/slightly aggressive!
The majority of people who are unwilling to bet (and potentially lose) everything they’ve worked so hard to earn but still want to invest will fall into this category. Rule of thumb is around 50-60% equities and 40-50% fixed income securities.
3. Risk Adverse a.k.a. Conservative
Conservative investors are more interested in preserving their wealth rather than growing them at high speeds. These investors are pretty much unwilling or unable to tolerate significant losses and would be happy enough with just beating inflation. That’s not to say they’re not interested in growing their wealth though; just at a more controlled risk level even if it means less potential returns.
Rule of thumb is around 70-80% fixed income securities and 20-30% equities.
! Note on the rule of thumb: Cash assets
You will notice that there are no cash assets included in all the categories. By right, it is recommended to have some cash assets for a little bit of liquidity. However, to show you how the allocations look like, I’ve simplified them to exclude cash.
Everyone has different levels of risk which they are comfortable with. Knowing what amount of loss you can take without keeping you awake at night is one of the basics in investing. It’s only then you can create an effective investment strategy. This is because if you go for volatile investments when you’re actually conservative, the market will shake you off pretty fast. And if the opposite was true, you would not be happy with the returns.
How did you find the quiz? What kind of investor are you? Do let me know in the comments below!
In any endeavor, you have to understand your tolerance for risk. What’s a failure you can afford?
– Christie Hefner