Investment Quiz: Are You A Low Risk or High Risk Investor?
The first step to being a successful investor is knowing yourself. Your financial situation, investment knowledge and emotional reactions are all factors in what kind of investor you are.
While no general investment quiz is an exact science, your answers to these questions can provide an estimate of where you fit on a spectrum from high-risk to low-risk investor.
The questions themselves may also help you think through the issues around investment risk and identify your comfort level with investing.
What is Your Investor Type?
Get a general idea of your tolerance for risk and the types of investments that might match well with your risk profile.
Click on the button next to the response which best fits your situation. There is no right or wrong response to these questions. Choose the response that most accurately describes how things are for you.
1. When will you need access to the money you’re planning to invest now?
Timing is everything.
A long time horizon allows you to take more risk. The sooner you need the money you’re planning to invest, the less risk you should take.
2. How much of a loss in value to your portfolio would make you feel very uncomfortable?
Investments can be anywhere on the spectrum from fully guaranteed to carrying the possibility of total and permanent loss. Some risk is necessary in order to earn a higher return on investment, but you should always consider the worst-case scenario before investing.
3. Have you invested through a significant market correction before (i.e., seen your investments decline by 15% or more)?
Theory is one thing, reality is another.
Investors often learn a lot about themselves by going through adversity. The tendency to panic out of investments when they lose value can make things worse by locking in those losses. Unfortunately, people don’t really know how likely they are to react that way unless they’ve been through it before.
4. How have you reacted to market corrections in the past?
During market declines, there are sellers, holders and buyers. Your reaction under those conditions says a great deal about your tolerance for risk.
5. Are you regularly contributing to this account, or drawing from it?
Negative cash flow means you have a relatively short time horizon, which exposes you more to market fluctuations. On the other hand, positive cash flow can actually help you benefit from those fluctuations.
6. How well does your “after-taxes” household income meet your current spending needs?
The more your income exceeds your spending needs, the better positioned you are to make riskier investments.
7. What portion of your assets are you considering for investment?
Put your investments in perspective.
The risk of any given investment should be viewed in context to the rest of your assets. The smaller an investment is, the less harm it can do.
8. How are most of your other assets invested?
Volatile investments are those that go up and down a lot and have a risk of permanent losses. If you already have a lot of volatile investments, you may want to balance that out with a lower risk investment this time around.
9. How much non-mortgage debt do you have compared to your savings and investments?
Non-mortgage debts include things like personal loans, car loans, student loans and credit card debt that carries over from month to month.
The more non-mortgage debt you have, the more of a demand it makes on your cash flow.
Unless you have substantial reserves to balance out that debt, this demand on your cash flow shortens your time horizon and increases your exposure to investment risk.
10. Have you taken any coursework in economics or finance?
Educating yourself about economics, finance and investing is important. The more you know, the more informed your decisions would be about risk.
11. Do you feel that you fully understand financial instruments before you invest in them?
Not everyone has a natural aptitude for investing, so be careful of taking risks you don’t fully understand.
What the Investment Quiz Does
The investment quiz doesn’t have all the answers. It’s just one way to gauge your tolerance for risk. It’s designed to help you clarify how your attitudes and needs match with low-risk, moderate-risk and high-risk investment styles.
Use this information to help you hone your strategy and determine which investments would be appropriate for your circumstances. Compare the financial options below as a next step.
Low-Risk Investor Resources
If your answers suggest you are a low-risk investor, your emphasis on stability means that your investments won’t earn much, but they can provide the safety and liquidity you need.
The best investments for you may be FDIC-guaranteed deposit accounts like savings and money market accounts. Certificates of deposit (CDs) are also a possibility if you can match the length of the CD to the timing of your cash flow requirements.
Moderate-Risk Investor Resources
If your answers suggest you are a moderate-risk investor, it means your best approach might be to balance some higher-risk investments with more stable ones. This will increase your return potential, but it also opens up the possibility of some losses in your investments.
You can pursue this kind of balanced approach by buying individual stocks and bonds or mutual funds through an online broker. You may also want to keep a portion of your money in more stable accounts like CDs. However, if you want help tailoring the right blend of investments to your needs, a robo-advisor can lead you through that process.
High-Risk Investor Resources
If your answers suggest you are comfortable with high-risk investments, you may want to include a heavy concentration of stocks, and possibly even riskier approaches such as options and margin trading. Such an approach allows you to pursue higher returns, but it also means accepting wide fluctuations in value and the possibility of permanent losses.
A robo-advisor could help you map out an approach with an emphasis on stocks; but to make more targeted investments in high-risk vehicles, an online broker might offer more possibilities.