How to Determine Your Investor Risk Appetite

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Investing is a risky business. Risk tolerance is an important factor when it comes to investing, and there are many ways for investors to determine how much risk they can handle. Risk appetite has three categories: low, medium, and high.

This blog post will cover questions you can ask yourself (and your advisor) in order to better understand where you fall on the spectrum of risk levels.

What is Risk Appetite?

Risk appetite is an investor’s willingness to take on risk. Risk-averse investors avoid taking risks in order to preserve their capital, while more aggressive or growth-oriented investors are willing to accept greater volatility and exposure to potential loss in exchange for potentially higher returns. Risk tolerance can be broken down into three categories: conservative, moderate, and aggressive.

What is my risk tolerance profile for investing?

Whether you’re starting your investment journey now, or looking to make a shift in your portfolio, it’s important to consider your Investor Profile or your risk tolerance profile. This should be used to determine your portfolio allocation towards cash, bonds, and stocks. 

These categories can be further subdivided when planning your portfolio. There are plenty of resources available on this topic, and they are generally very good – but what does it all really mean? That part may be a bit more difficult to answer for yourself.

A Closer Look at Your Personal Risk Profile

Answer the following questions published by UITF.com.ph will describe the process of determining your risk profile and what the implications are. 

The two big categories to be considered are:

  • Your time horizon (how long will these funds be invested
  • What will your reaction be to major swings

Greater risk, in the context of long-term investments in the overall market, has historically led to greater rewards.

How to talk to clients about their risk tolerance — PAi.com

How Long Should You Invest? (Time Horizon)

How long do you plan to be investing in the market? This one is fairly simple – the longer you plan to have your investments in the market, the more aggressive you should be in your risk tolerance.

Anything under a few years is recommended to be kept in cash and bonds. By the time you start to look at investment horizons greater than 11 years, the highest risk score is recommended.

Conclusion

This is a good tool to assess your investor profile, as long as you’re able, to be honest with yourself while filling it out.  Based on the image chart above, where do you stand? Are you more conservative, or more aggressive?  Take 5 minutes or so to find out!

Here is a link to the Investor Profile Questionnaire. Happy Investing!

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