How do I gauge my risk appetite in my investment planning? - Nerdwallet

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How do I gauge my risk appetite in my investment planning?

February 8, 2013

Advisor answers

There are two issues with risk. The first is your financial goal for the asset: if you have a long-term goal a more volatile asset with a higher average return makes sense. If you are looking to the short-term, you’ll want a more steady vehicle with a lower average return. The second isse is your tolerance for volatility. Can you remain steady when the asset is fluctuating (either on the upside or downside).

A recent study conducted by the University of California, Berkeley, and published in the Novemb...

Alexey Bulankov

Alexey Bulankov


Most of us invest because we have to, not because we want to. While many enjoy watching the working of capital markets, to most investing is a mean to an end, not an end itself. The selection of right risk level comes down to two questions:

• How much risk must I take? (i.e. what rate of return do i need to generate to get my goals, and what is the risk of investing that way?)

• How much risk can I take? (personal risk tolerance is as individual as pain tolerance and some&nb...

Christopher Arnold

Christopher Arnold


Your ‘risk appetite’ will be determined by a number of factors.

You always want the risk you take with your investments to correspond with the purpose and timeframe for setting funds aside. ‘Retirement’ may be your purpose but everyone will have a different timeframe based on how long they have until retirement. Taking some risk can be OK when there is a long time before needing the funds – when you are closer to needing the money, less risk is advisable.

If you will need the investment in 5 years or less, more liquid vehicles such...

This is a great question. The answer is much tougher than filling out your typical "risk tolerance questionnaire". Everybody loves risk when the market is up and is super conservative when the market is down, at least that is what they think. It is up to us, the advisor, to really dig deep and find out what kind of risk is appropriate to you on the front end rather than after you deem yourself super conservative and then expect your portfolio to outperform the S&P 500. All of the other things my colleagues ...

John Buerger

John Buerger


There are a number of online tools you can use to gauge your risk appetite. One that I like is called RiskAlyze. It is free for you on the web (disclosure: we use the professional version with our clients).

Be careful with these risk questionnaires, many do not separate out your "risk appetite" (or tolerance) from your "risk perspective." Many also ignore the difference between downside risk tolerance and upside risk tolerance.

Also be VERY careful to avoid the assumption that taking on more risk means getting better long-run returns.


Guy Baker

Guy Baker


Most advisors use a risk tolerance questionnaire (RTQ) to gauge your appetite for risk. Be careful when you answer these questions because you may respond in a way that is not really reflective of you risk tolerance.

For instance, suppose the question asks, "How would you feel if your portfolio went down 10%?" Worried, Terrified, Unconcerned. In a vacuum, your answer might be adequate to reflect your RT. But if the question was framed to include a time frame, you might answer differently.

Suppose it said instead, "went down 10%, 1 time ...

There are two fundamental concepts for an investor to consider in gauging their risk “appetite” for their personal investmentplanning needs:

1. Risk tolerance: an investor must first consider the level of market risk that theyare comfortable in assuming in their investments. Risk tolerance assessment ispart of the fundamental due diligence an advisor will undertake in developing afinancial plan with you, both in discussion and in formal paperwork.

Please understand that risk toleranceassessments, while providing a theoretical fra...

At our firm, we take time to discover and understand a client’s goals, challenges, and current life situation so that we can help each client assess her or his own unique risk tolerance. A key component of this journey of discovery is determining what the overall goal of the investing process should be for you.

Here are a few helpful questions you should consider:

• What do your assets need to do for you? For example, are you looking to build a portfolio that will support you during retirement? Are you looking to creat...

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