Take the test: How much in­vest­ment risk can you re­ally han­dle?

The Daily Telegraph - Your Money - - YOUR MONEY - Laura Suter

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.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.