Take the test: How much investment risk can you really handle?
In uncertain markets, how much investment risk can you really stomach? In volatile times there are opportunities to dive in and buy bargain stocks, but this always comes with risk. Before buying investors need to know how much risk they can tolerate.
Buying in market dips last year, and snapping up some good companies at cut prices was a strategy that paid off. The market slump after Brexit provided an opportunity to do just this, with many investors cashing in.
However, the danger in these environments is that when markets fall, investors lose their nerve and sell. By doing so they potentially sell at the bottom of the market, or at least before substantial gains have been made.
This selling crystallises losses, and it can take longer to rebuild returns to the original position.
Before embarking on bargain buying investors need to know whether they have the stomach to ride the rollercoaster of markets. Asking theoretical questions can help to determine your true risk tolerance.
Questions such as: “Imagine you were in a job where you could choose whether to be paid salary, commission or a mix of both. Which would you pick?” Or: “By how much could the total value of all your investments go down before you would begin to feel uncomfortable?”
Establishing that “risk tolerance” is vital because it means you can structure your investments in a way that reduces the chance of returns that are too volatile for you to handle.
Those who are more risk averse can create a portfolio that is likely to be steadier during big market events, such as Brexit, while those who can stand more volatility can invest in riskier assets.
The problem is that we are often a poor judge of our own risk tolerance. Many investors focus on the gains available by investing in riskier assets, but when confronted with losses and investments falling in value they are less comfortable.
FinaMetrica, a technology company, asks investors questions about their personality and likely behaviour to establish investors’ true attitude to risk.
Those that have a low-risk tolerance, are better suited to invest in assets such as bonds or cash, that are less likely to soar and dive in price. Those with a higher risk tolerance can allocate more to shares and riskier areas, such as smaller companies.
Telegraph Money has secured exclusive free access to the FinaMetrica system to help readers better understand their risk tolerance.
Answer the questions and it will establish where you fit on a scale of 0 to 100, using comparisons with 850,000 other respondents. The test requires an email address, but none of your personal data is used beyond the test itself. Find the test at riskprofiling.com/telegraph.