Do you seek out the safest of safe places to keep your savings or are you happy to crash and burn in the chase for bumper profits?
There’s no such thing as risk-free investing. Bank deposits might now be government guaranteed up to $250,000 but what about the risk that if you stick to term deposits and savings accounts to grow your wealth it won’t even keep up with inflation?
Some commentators are saying Australian investors now have too much money in cash and fixed interest and not enough in growth investments like shares and property.
On the other hand more and more small investors are branching out into relatively new and untested investment vehicles like Contracts for Difference (CFDs) and Exchange Traded Funds (ETFs) in the hope of achieving greater diversity and greater returns and in spite of the higher risks involved.
There are two things you need to know about risk:
1. What risk type you are
2. What types of risk are involved in making a certain type of investment
Once you know both of those things you can marry the two together to achieve the right investment outcomes for your personality type.
1. Your risk type
Let’s start by looking at your risk type.
The way we respond to risk, threat and uncertainty is unique to each person and it’s hardwired.
Some people are, by their nature, anxious, fearful and prone to panic. At the other extreme, others are clam, imperturbable and almost oblivious to danger.
This applies to all areas of life but with the potential financial losses involved with investment, knowing your true tolerance to risk is important when setting your strategy.
With that in mind, UK firm Psychological Consultancy Ltd (PCL) has developed a unique test for investors to help ascertain risk type, called the Risk Type Compass.
The test assesses risk tolerance based on personality, examining both your natural response to risk and your current risk attitude in order to identify your first type.
To find out your risk type, fill in the YMM Questionnaire, created exclusively for Your Money Magazine by PCL.
The quiz examines your attitude to risk in five areas: finance, recreation, socialising, health and safety and ethics.
It gives an overall risk tolerance score which you can match to suitable investment types.
2. Investments to match your risk profile
Now let’s marry your risk profile to the right types of investment.
If your quiz results indicate that you have a LOW RISK personality type, it means you’d rather not take a risk if you can help it. The idea of losing money is an anathema to you. Your inclination is to go for the safe option: the rock-solid return that is guaranteed.
• savings accounts
• term deposits
• top-rated blue-chip shares
• low-risk ‘buy and hold’ properties near city centres
If your quiz results indicate you have a medium-risk personality you are not averse to the concept of bearing a financial loss if things go wrong so long as the upside is likely to be greater but you’re not likely to take a flying punt on the “next big thing’.
• renovation and development properties
• property in ‘up and coming’ areas or smaller, growing cities
• mainstream shares
Is that pack of cards in your hand? You have nerves of steel and thrive on the excitement and potentially huge profits you can reap from the diciest of deals. Of course, you haven’t won them all and you’ve lost big in the past but the next opportunity is just around the corner. The world is your oyster.
• small-cap shares
• high-growth properties in regional/mining areas
• property development
• currency trading
NOW YOUR'RE READY TO TAKE THE RISK QUIZ
The YMM risk quiz
STEP 1: For each of the statements below circle a rating from 0-4 to indicate the likelihood that you might engage in the activity or behaviour described
STEP 2: Add up your scores for each question (BELOW) to work out your total risk tolerance rating.
STEP 3: You can see which risk tolerance category you fall into using this guide:
Total score 40 or less: LOW RISK TOLERANCE
Total score 41 to 52: MEDIUM RISK TOLERANCE
Total score 53 or more: HIGH RISK TOLERANCE
STEP 4: Now match your risk tolerance to appropriate investments on the previous page of this article
|Do you think you might||Very< unlikely||Unlikely||Unsure||Likely||Very likely|
|Not tell a friend you've broken something in their home||0||1||2||3||4|
|Pay for a holiday on your credit card that you really can't afford||0||1||2||3||4|
|Fail to attend a routine health check||0||1||2||3||4|
|Cycle on a busy main road||0||1||2||3||4|
|Volunteer to lead a discussion group||0||1||2||3||4|
|Say what you think of someone even if it's sure to offend||0||1||2||3||4|
|Not return a misdirected letter that looks important||0||1||2||3||4|
|Take a ride on a 'twister' roller coaster||0||1||2||3||4|
|Lend money to a friend who is already in debt to you||0||1||2||3||4|
|Buy a holiday home to rent out||0||1||2||3||4|
|Not tell a waiter that they failed to charge for dessert||0||1||2||3||4|
|Invest in a very lucrative but risky business||0||1||2||3||4|
|Choose the unhealthy option when given a choice of foods||0||1||2||3||4|
|Travel abroad without necessary vaccinations||0||1||2||3||4|
|Go hiking in challenging weather||0||1||2||3||4|
|Reveal intimate personal details to someone you've just met||0||1||2||3||4|
|Exaggerate your past income when going for a new job||0||1||2||3||4|
|Go cage diving with sharks||0||1||2||3||4|
|Give voice to unpopular opinions at work||0||1||2||3||4|
|Put your personal letters through your work mail account||0||1||2||3||4|
|Eat recently expired food products that still look fine||0||1||2||3||4|
|Tell risque jokes in unfamiliar company||0||1||2||3||4|
|Swim in the sea when the tide is strong||0||1||2||3||4|
|Fail to finish a course of antibiotics||0||1||2||3||4|
|Leave your job to start up your own business|
|TOTAL RISK TOLERANCE SCORE|
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