Understanding risk tolerance
Risk tolerance is your ability and willingness to handle fluctuations in your investment values. It is influenced by factors like your age, financial goals, investment timeline, and emotional comfort with uncertainty. Understanding your risk tolerance is crucial for building a portfolio you can actually stick with long-term.
Risk assessment questionnaire
Work through these six questions honestly. Answers further down each list generally point towards a higher risk tolerance.
1. What is your age range?
- Under 30 years old
- 30-50 years old
- 50-65 years old
- Over 65 years old
2. When do you plan to use this money?
- Within 2 years
- 2-5 years
- 5-15 years
- More than 15 years
3. If your portfolio lost 20% in a month, what would you do?
- Sell everything immediately
- Sell some and move to safer investments
- Hold steady and wait for recovery
- Buy more at the lower prices
4. How would you describe your investment experience?
- I'm a complete beginner
- I have some basic knowledge
- I've been investing for several years
- I'm an experienced investor
5. What's your primary investment goal?
- Preserve my money (avoid losses)
- Generate steady income
- Grow my wealth over time
- Maximise growth (accept higher risk)
6. How important is it to beat inflation?
- Not important - I just want to avoid losses
- Somewhat important - I want to keep up with inflation
- Very important - I want to beat inflation significantly
- Critical - I need high real returns
Example result: a moderate risk profile
Characteristics
Balanced approach
A balanced approach to risk and return.
Medium to long horizon
A medium to long-term investment horizon.
Tolerates swings
Can tolerate moderate portfolio swings.
Growth with guardrails
Seeks growth while managing downside risk.
Recommended asset allocation
| Asset class | Allocation |
|---|---|
| Stocks (domestic) | 50% |
| International stocks | 20% |
| Bonds | 25% |
| REITs | 5% |
Return range (historical)
7-9%
Annualised, not guaranteed
Worst year
-15%
Historically observed
Best year
+25%
Historically observed
Risk profile types
Conservative
Priority on capital preservation with minimal volatility.
- Allocation: 20% stocks, 80% bonds
- Return range (historical): 4-6%
- Best for: near retirement, short-term goals
Moderate
Balanced approach seeking growth with controlled risk.
- Allocation: 70% stocks, 30% bonds
- Return range (historical): 7-9%
- Best for: medium-term goals, balanced approach
Aggressive
Growth-focused with high tolerance for volatility.
- Allocation: 90% stocks, 10% bonds
- Return range (historical): 9-12%
- Best for: young investors, long-term goals
Very aggressive
Maximum growth potential with the highest volatility.
- Allocation: 100% stocks (plus alternatives)
- Return range (historical): 10%+
- Best for: very long-term, high risk tolerance
These ranges describe how such portfolios have behaved historically. No allocation guarantees a future return.
Factors affecting risk tolerance
Personal factors
- Age and time horizon - younger investors can typically take more risk
- Financial situation - stable income allows for higher risk tolerance
- Investment goals - growth goals may require accepting more risk
- Emergency fund - a good safety net enables higher risk investments
Emotional factors
- Loss sensitivity - how you react to seeing portfolio losses
- Investment experience - experience with market cycles builds tolerance
- Stress tolerance - ability to handle uncertainty and volatility
- Sleep test - can you sleep well despite portfolio swings?
Using your risk assessment
Choose your asset allocation
Use your risk profile to determine the right mix of stocks, bonds and other assets. This becomes your target allocation for building your portfolio.
Select appropriate investments
Choose index funds, ETFs or target-date funds that match your risk tolerance. Avoid investments that are too conservative or too aggressive for your profile.
Stick to your plan
During market volatility, remember your risk assessment. If you are staying within your comfort zone, avoid emotional decisions based on short-term movements.
Reassess periodically
Your risk tolerance may change over time due to age, financial situation or experience. Reassess annually or after major life changes.
Risk assessment tips
- Be honest about your emotional reactions
- Consider your worst-case scenario tolerance
- Factor in all sources of income and savings
- Think about your long-term goals
- Start conservative if you are unsure
- You can adjust as you gain experience
- Don't let fear prevent you from investing altogether
- Seek professional advice for complex situations