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Here's a quiz that attempts to measure how risk tolerant you are

Early on at SMI, I developed a brief quiz to help our readers determine how risk averse they are. The results from that quiz, in combination with our "seasons of life" chart, help them arrive at a stock/bond allocation suitable to their risk tolerance and age.

At least that's the idea. As we all know, however, the way you answer questions in what is essentially an academic exercise can lead to outcomes that are quite uncomfortable in the depths of a severe market selloff. As the recent bear market demonstrated, many folks are much more risk averse than they had imagined.

The current issue of Money magazine has an article on this subject, pointing out...

The asset-allocation tools you'll find online or that an adviser will employ when working with you routinely recommend stock allocations of 70% or more if you're younger than 55 or so.... That's because, over the long run, stocks return more than bonds, so odds are (notwithstanding the past decade's lousy returns) that a heavier stock allocation will give you more money in the end.

Rational, yes. But some of the best work done in the study of risk tolerance concludes that many people can't handle the swings that come with such big stock weightings. As a result, they'll frequently sell at or near market bottoms.

FinaMetrica, an Australian company that has developed a respected risk questionnaire used more than 250,000 times by financial planners, has found that only 7% of investors can stand to have more than 75% of their total investments in stock, and only 1% can handle more than 87%. "The investment industry tends to encourage people to take on more risk than they're emotionally equipped to handle," says FinaMetrica co-founder Geoff Davey....

Risk tolerance isn't about how much risk you ought to take when you invest; it's about how much you can take before you'll crack.

The article goes on to say that FinaMetrica usually charges $30 for the quiz and calculating/explaining your personalized results, but it's free via Money through the end of November. An opportunity to know my investing self better and free to boot? Irresistible. I clicked on the link and spent about 10 minutes taking the quiz.

For what it's worth, I ended up in Risk Group 5, meaning only about 7% of all investors are more tolerant of risk than I am. In terms of the SMI quiz, I'm a "daredevil." Even so, I was told I'm "somewhat less risk tolerant" than I thought I was. If that's true, I can only imagine the wild level of risk I thought I would be comfortable with.

If you'd like to take the quiz, click here. How'd it rank you?

Posted by Matthew at November 17, 2009 1:34 PM

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