Quiz: What is your risk appetite?
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Here’s a quick interactive quiz.
This quiz is featured in Burton Malkiel’s – A random walk down wall street and is designed by personal finance expert William E. Donoghue and the editors of Donoghue’s Money Letter to help investors determine the amount of risk you are likely to feel comfortable taking. Needless to say, no simple questionnaire will give you a completely reliable index on your tolerance for risk, but it will make you think.
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Interpreting your risk score
Based on the Donoghue money letter, the scores are classified into three buckets with these explanations:
Your score What it means Below 21 You are a conservative investor, allergic to risk. Stay with sober, conservative investments 21 to 35 You are an active investor, willing to take calculated, prudent risks to gain financially Above 35 You are a venturesome, aggressive investor
Investors would be well-served to use this insight to compensate for likely self-defeating behaviour and to not get distracted from the aim of investing for the long-term.
If you scored below 21
- Return of capital means more to you than Return on capital. The idea of the slightest speculative element in investments is likely to keep you up at night, irrespective of how they do, potentially leading to self-defeating actions (like selling at market bottoms)
- You’re best suited to work with a financial adviser who can talk you through a long-term plan and how equity investment fits into it
- The mandate for the adviser should ideally be to allocate money to funds investing in large-cap blue chip funds of pedigree only with the remainder in liquid funds. Suggest taking a largely hands-off approach with semi-annual interactions to review performance and discuss rebalancing if markets have risen rapidly
- Investing mistake you’re susceptible to: Stay away from equities citing their riskiness and stick with recurring deposits and bonds over the long-term
If you scored between 21 and 35
- You’re ready and willing to invest for wealth-building and at the same time understand that stock prices rarely move in a straight line
- Best suited to do some of your research and decide on an overall asset allocation plan that should ideally consist of index funds, large cap funds making up the bulk of your allocation, combined with a smaller percentage of your personally chosen stocks, all meeting stringent criteria on sales, consistency and quality earnings
- You would be well-served by leaving the funds on auto-pilot, with monthly SIPs that are adjusted upwards each year and to revisit your stock picks not more often than once a year
- Investing mistake you’re susceptible to: Letting Mr. Market dictate your actions, by buying when all the tickers show up arrows and backing away when markets fall
If you scored above 35
- Falling at the other end of the spectrum from the overly conservative investor, speculative investments are likely to appeal to you, but the challenge will be to steer clear of leverage in order to boost returns that could well undo years of good work
- In terms of asset allocation, the suggestion would be similar to that for the 21 to 35 scorers, with the difference in the composition of the funds chosen. Here, you could expand your consideration set to funds investing in mid and small caps given their tendency to outperform large caps given the right conditions
- If it appeals to you, earmark a small part of your portfolio for more “active” management but set limits on both maximum allocation and to number of times in a year you review and “take action”. Leverage of any kind should be an absolute no-no given it’s asymmetric payoffs
- Investing mistake you’re susceptible to: Mistaking the stock market for a casino and trying one-too-many “strategies”
The simplicity of the quiz is meant to identify broad tendencies in your investing behaviour and should be used only as an indicator of the kind of mistakes you’re likely to make and be able to take steps to counter them. In the end, the only certain way to learn about investing is to read as much as you can and to start with small steps to understand your own self, strengths and weaknesses better.
For a more detailed post: read “How much risk is right for you?”
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