Risk questionnaire
You can click here to go straight down this page to the questionnaire, but I wanted to provide some background first.
I don’t like most risk questionnaires
I find most risk questionnaires that banks and investment companies set up are too simplistic and tend to encourage people to minimise risk. Lower risk is appropriate for some but not for all. The key is to get the right amount of risk for you, and then to try to maximise the returns you can get at that level of risk.
Click this link to find out more about Taking the Right Amount of Risk.
I’ve tried to avoid that mistake by basing my questionnaire on the excellent risk tolerance questionnaire created by John Grable and Ruth Lytton as visiting professors at the University of Missouri. The questionnaire was published in the Financial Services Review. You can find the original version here.
How my risk questionnaire differs
My version of the questionnaire is different from the original University of Missouri because some of the terms they use won’t make sense to most people visiting this website.
Also, I’ve made the following assumptions:
- You are investing for your retirement or a similarly significant nest egg or event
- You are at least 10 years away from needing to use the money you’ve invested
- You have followed the steps outlined in Section 3 – Laying the foundations.
Also, I’ve created my own scoring for this questionnaire which allows for the fact that I have three levels of risk in my low-cost investment portfolios: lower, medium and higher.
The Questionnaire
Remember, this is not a school test. This is an indication of what might be right for you.
The more honest you are in your answers, the more likely it will be for the outcome to provide a reasonable indication of the appropriate level of risk for your investments.
Finally, please remember that this is not a substitute for advice.
Make a note of your answer for each of the following and work out your score at the end.
1. In general, how would your best friend describe you as a risk-taker?
a. A real gambler
b. Willing to take risks after completing adequate research
c. Cautious
d. A real risk-avoider
2. You are on a TV game show and can choose one of the following. Which would you take?
a. £1,000 in cash
b. A 50% chance of winning £5,000
c. A 25% chance of winning £10,000
d. A 5% chance of winning £100,000
3. You have just finished saving for a once-in-a-lifetime holiday. Three weeks before you plan to leave, you lose your job. You would:
a. Cancel the holiday
b. Take a much more modest holiday
c. Go as scheduled, reasoning that you need the time to prepare for a job search
d. Extend your holiday, because this might be your last chance to go first-class
4. If you unexpectedly received £20,000 to invest, what would you do?
a. Deposit it in a bank account, keep as cash, or buy premium bonds
b. Invest it in low-risk, high-quality bonds or bond mutual funds
c. Invest it in company shares or investment funds
5. In terms of experience, how comfortable are you investing in company shares or funds that consist of company shares?
a. Not at all comfortable
b. Somewhat comfortable
c. Very comfortable
6. When you think of the word “risk”, which of the following words comes to mind first?
a. Loss
b. Uncertainty
c. Opportunity
d. Thrill
7. Imagine this scenario: Some experts are predicting prices of assets such as gold, jewels, collectibles, and real estate (hard assets) to increase in value; bond prices may fall, however, experts tend to agree that government bonds are relatively safe. Most of your investment assets are now in high-interest government bonds. What would you do?
a. Hold the bonds
b. Sell the bonds, put half the proceeds into a savings account, and the other half into hard assets
c. Sell the bonds and put the total proceeds into hard assets
d. Sell the bonds, put all the money into hard assets, and borrow additional money to buy more
8. Given the best- and worst-case returns of the four investment choices below, which would you prefer?
a. £200 gain best case; £0 gain/loss worst case
b. £800 gain best case; £200 loss worst case
c. £2,600 gain best case; £800 loss worst case
d. £4,800 gain best case; £2,400 loss worst case
9. In addition to whatever you own, you have been given £1,000. You are now asked to choose between:
a. A sure gain of £500
b. A 50% chance to gain £1,000 and a 50% chance to gain nothing
10. In addition to whatever you own, you have been given £2,000. You are now asked to choose between:
a. A sure loss of £500
b. A 50% chance to lose £1,000 and a 50% chance to lose nothing
11. Suppose a relative left you an inheritance of £100,000, stipulating in the will that you invest ALL the money in ONE of the following choices. Which one would you select?
a. A savings account or premium bonds
b. An investment fund that owns shares and bonds
c. A portfolio of shares of 15 companies
d. Commodities like gold, silver, and oil
12. If you had to invest £20,000, which of the following investment choices would you find most appealing?
a. 60% in low-risk investments, 30% in medium-risk investments, 10% in high-risk investments
b. 30% in low-risk investments, 40% in medium-risk investments, 30% in high-risk investments
c. 10% in low-risk investments, 40% in medium-risk investments, 50% in high-risk investments
13. Your trusted friend and neighbour, an experienced geologist, is putting together a group of investors to fund an exploratory gold mining venture. The venture could pay back 50- to 100-times the investment if successful. If the mine is a bust, the entire investment is worthless. Your friend estimates the chance of success is only 20%. If you had the money, how much would you invest?
a. Nothing
b. One month’s salary
c. Three month’s salary
d. Six month’s salary
14. On a scale from one to five (where one is lowest and five highest), how would you rate your overall understanding of personal finance and money-management concepts and practices?
a. 1
b. 2
c. 3
d. 4
e. 5
15. Suppose you had £100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?
a. More than £102
b. Exactly £102
c. Less than £102
d. Do not know
16. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know
17. Please say whether this is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund”.
a. TRUE
b. FALSE
c. Do not know
Calculating your score
Now work out your total score using the following table. For example, if you answered “b” to question 1, you would earn two points.
| a | b | c | d | e | |
| 1 | 3 | 2 | 1 | 0 | |
| 2 | 0 | 1 | 2 | 3 | |
| 3 | 0 | 1 | 2 | 3 | |
| 4 | 0 | 1 | 2 | ||
| 5 | 0 | 1 | 2 | ||
| 6 | 0 | 1 | 2 | 3 | |
| 7 | 0 | 1 | 2 | 3 | |
| 8 | 0 | 1 | 2 | 3 | |
| 9 | 0 | 2 | |||
| 10 | 0 | 2 | |||
| 11 | 0 | 1 | 2 | 3 | |
| 12 | 0 | 1 | 2 | ||
| 13 | 0 | 1 | 2 | 3 | |
| 14 | 0 | 1 | 2 | 3 | 4 |
| 15 | 3 | 1 | 0 | 0 | |
| 16 | 0 | 1 | 3 | 0 | |
| 17 | 0 | 3 | 1 |
Which of the following indicative brackets does your score fall into?
32-47 Higher risk
20-31 Medium risk
0-19 Lower risk
This isn’t a hard-and-fast conclusion, but it should help you to determine which portfolios might be most appropriate for you.