Your personal tolerance for risk can creep into your financial decision making. Take this quiz to find out how.
Whether you realise it or not, we all have investments, and we all make risk-based decisions every day. You perform a risk assessment every time you hit the snooze button before an early morning flight. Or when you decide whether or not to leave the house with an umbrella on a cloudy morning.
A person’s appetite for risk doesn’t describe choosing steak when they have high cholesterol, but rather their mindset for making financial decisions. Their understanding of the level of risk they are willing to take in making financial decisions can help people understand their investing style, whether it’s all in, or leaving it to a fund’s financial managers to monitor it for them.
Things they might take into consideration include their age and their capacity to suffer loss, as well as their long, medium and short-term goals. All of these and more may help them to better understand your appetite for risk, which can then help them start hitting their financial goals now and in retirement.
If you have no idea what your appetite for risk might be, take this quiz to see how investment decisions and goals can affect risk appetite.
1. How would you describe your experience as an investor?
A) It’s something that I plan to do ‘one day’, but at the moment I prefer to build up my bank balance.
B) I understand the importance, but I am not confident making any decisions without advice.
C) I have superannuation and direct investments which I confidently manage with sporadic regularity.
D) Like Warren Buffett, the market’s performance dictates what I eat for breakfast.
2. You unexpectedly come into $5,000 and decide to invest it in something for the short term. How do you decide to spend it?
A) Pop it into a three-month term deposit to earn a fixed interest
B) On improvements that should increase the value of your home.
C) A luxe overseas trip, it’s time to invest in some memories.
D) On Red on the roulette table at the casino – double or nothing.
3. Okay, take that same unexpected $5,000 and put it into something long term. Which appeals to you the most?
A) Government bonds.
B) A local infrastructure project.
C) An experimental project turning honey into electricity.
D) Ambitious new plans to launch the Titanic 2.
4. An international business magnate offers you the chance to invest in their airline – but only in one outbound route from Sydney. Which would you invest in?
A) Bali - a high volume, low margin route. Almost guaranteed return on your investment.
B) Italy - a moderate volume route with moderate returns.
C) Greenland - a low volume but high margin route. This airline chartered only a few flights here last year and while profits can be much higher than Italy and Bali routes – it can also make a loss.
D) Antarctica - a low volume but very high margin route. The airline only offers private jets to this destination so if it gets booked even once you would earn the most returns from this route.
5. Your investment in a space tourism start-up is starting to lose money. It tells investors, that despite this, it will still be successful – promising huge returns for investors that stick with them. At what point would you reinvest your money into a lower risk investment?
A) 5% loss
B) 15% loss
C) 30% loss
D) 50% loss
6. How much time do you have to manage your superannuation investments?
A) No time really – it’s not a priority for me right now.
B) Limited time, so I prefer to choose a fund that is closest to my risk appetite and leave it to the experts to manage it.
C) I make time for this purpose, and have a mix of both assets I choose directly and funds that invest in asset classes I want exposure to.
D) Investing is my life, and I manage my portfolio of investments or have a self-managed super fund where I pick everything from the shares to specific alternative assets.
'Safe as houses': No or a very low appetite for risk
'Level headed': Medium or moderate appetite for risk
'Risk and reward': High appetite for risk
'Put it all on black': Very high appetite for risk
This article was first published by The Guardian on 28 May 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.