Lisa Whitley — As is so often the case, the ancient Greeks said it first and said it best: “Know thyself.” And there is no area where this axiom is more applicable than investing.
You may be familiar with the concept of “risk tolerance.” When it comes to how you invest your retirement savings, are you the daredevil sort who is happy to hold a portfolio that can sometimes swing up and down in value? Or do the movements of the market make you nervous? Do you actually know what kind of investor you are?
Likely you have heard of robo-advisors, which use computer algorithms that build an investment portfolio based on your responses to questions that seek to ferret out your risk tolerance. But in fact, these types of risk assessments have been around for quite a few years, based on academic research. One of the most popular ones can be found here at Rutgers University.
This 13-question quiz poses a series of questions that are intended to help you understand where you fall on the conservative to aggressive investor continuum. You may think that you are that daredevil, but are you really? Conversely, are you really as risk averse as you say you are? Knowing how you score — low risk tolerance, below average, average, above average, high risk tolerance — will help you choose an investment portfolio that is right for your comfort level. Knowledge of your risk tolerance will help you weigh the balance between more risky choices (such as stocks) and less risky choices (such as bonds). In investor-speak, your asset allocation will be based on your personal risk tolerance.
A final note: your risk tolerance is not immutable (permanently set). Over time, either as your life evolves or your comfort level with investing grows, you may find yourself becoming less risk-averse or perhaps more risk-averse. Check in from time to time to make sure that you are still both knowledgeable about and comfortable with how your most important savings are invested. In short, know thyself!