Understanding the risks in your financial journey is a key to maximize your money management.
Financial planning has some questionnaires that can measure your risk taking appetite which tell you your risk tolerance limit. Risk tolerance varies with age, income and financial goals
But it is also important to note that these risk tolerance scores are not iron clad. There is a difference between your risk tolerance and what risks you must take in a given situation.
The questionnaire only labels you into various slots like conservative, moderate and aggressive investor. The risk taking capacity is dynamic and changes from situation to situation.
Sample Risk questionnaire
What is your age?
More than 60 years.
18 – 35 years
How much of your monthly income can you invest after monthly expenses?
Less than 10%
10 to 30 %
More than 30%
How many dependents do you have?
1 to 3
More than 3
How do you expect your income to increase during the next 5 years?
Income will decrease
Income will remain the same
Income will increase
How many years have you been investing?
One to five years
More than five years
How would you like your portfolio to grow with respect to inflation?
Will match inflation and has low level of risk
Will exceed inflation moderately and has moderate risk
Will increase by a significant margin and has high risk
How would you prefer your portfolio to behave?
Returns range from – 5% to + 5% with average returns of 6%
Returns range from – 10% to + 20% with average returns of 12%
Returns range from – 15% to + 35% with average returns of 20%
How distant (in time) is your goal?
Less than 4 years
Between 4 to 10 years
More than 10 years
How much have you saved towards your goals?
More than 50% of your goal
Between 30 – 50% of your goal
Less than 30% of your goal
What is the equity component of your investments?
Less than 20%
Between 20% to 60%
More than 60%
Rate yourself by giving a score of 1 when you answer a, 2 when you answer b, 3 when you answer c and 4 when you answer d.
If your score is between 30 – 40, you are an aggressive investor. Moderately aggressive investor if the score is between 20 – 30 and conservative if your score is less than 20.
The risk of not getting risks right!
While it is a good starting point, there are many caveats when it comes to understanding risks.
The concept of risk is highly personality and situation based. Somebody may be scared of the stock markets but don’t think twice taking risks at the racecourse.
The concept of risk tolerance seems insane to me. Would you go for a pain tolerance test before you follow the Doctor’s prescription?
More important is the financial goals and an understanding of the risks required to achieve that goal. In the journey towards achieving the goals, you must learn to manage the risks instead of avoiding the risks.
To conclude, here’s the point:
The risk in your investments should be in sync with other risks and responsibilities in your life. And enjoying the journey towards your financial destination is more important than worrying about the risks.