Are YOU a financial daredevil? Try this test and find out...
WOULD you be happy to parachute out of a plane? If so, it’s fair to say you’re a risk taker and enjoy the rush of adrenaline. Yet, just because you’re a risk taker in this instance does not mean you’d have the stomach for investment risk. Similarly, if your idea of fun is more tea and a crossword than bungee jumping, that does not mean you’ll be cautious when it comes to investing.
Assessing how comfortable we are taking on risk is crucial to successful investing. You need to find that happy balance between taking enough risk to get the return you want, but not so much that you’re constantly worried.
It’s easier said than done. For a start, financial risk is completely different to other types – and investors often misguidedly conflate them. There is little connection between how comfortable you are taking risks in other parts of your life and those that you take with your cash.
Secondly, we often associate risky behaviour with recklessness and profligacy. But taking investment risk is necessary and often prudent. It may feel counter-intuitive to take risk with pension savings or money intended for a child’s future.
But it is often reckless not to take on any risk because savings have less opportunity to grow.
Your attitude to investment risk will have been shaped throughout your life – in response to your upbringing, your previous experiences with money, even the financial environment you live in. Because it’s nuanced, many investors fail to calculate theirs correctly.
This can cause all sorts of problems. You don’t want to find out you’re more risk-averse than you thought when you’re lying awake at three in the morning worrying about your investments.
And you don’t want to lose your nerve and feel compelled to sell at the worst moment just after markets plummet.
For over a decade, behavioural finance specialists at Barclays Wealth Management & Investments have been fine tuning a tool that builds a detailed picture of their clients’ investment attitudes. They ask clients a series of carefully-crafted questions to get to the heart of their true attitude to investment risk.
So we challenged them to design a version for readers of The Mail on Sunday.
Rob Smith, head of behavioural finance at Barclays Plan & Invest, says: ‘Most investors choose their own attitude to risk; conservative, moderate or aggressive. This gets them to constructing an investment portfolio, but doesn’t take into account whether they have the composure to hold their investments in all market conditions.’
He adds: ‘Our financial personality assessment considers a number of different dimensions that reveal how you truly think and feel about your money and investments. A better understanding of your attitudes can help you not only get invested, but also stay invested no matter what the world throws at you.’
How to take the test
READ the following eight statements and decide how much you agree or disagree with them on a scale from one to five. If you ‘strongly disagree’, give yourself one point, if you ‘strongly agree’ then give yourself five points, and if you’re somewhere in between, give yourself two, three or four points accordingly. Add up your score to find out your investing personality.
Risk tolerance
1. Compared to other people, I am prepared to take higher financial risks. 2. In order to achieve high returns, I am willing to choose high-risk investments. 3. Even if I experienced a significant loss on an investment, I would still consider making risky investments. 4. I have invested a large sum in a risky investment for the excitement of seeing whether it goes up or down in value. 5. It is likely that I would invest a significant sum in a high-risk investment. 6. I am willing to risk a significant amount of my investible wealth in order to get a good return. 7. I am a financial risk taker. 8. I enjoy making speculative investments in specific assets with portions of my wealth.
An awareness of your financial personality is crucial to successful investing, but it’s not the only consideration. You will also need to factor in your personal circumstances, including how much you’re investing and how long you have.
For example, if you’re investing most of your life savings, you are likely to be more cautious than if you are investing a smaller chunk.
Similarly, if you are investing for an event that is still decades away, such as for a young child’s future, you can afford to be bolder than if you’ll need the money in a few years’ time.
Finally, while you need to take risk to be rewarded, beware that taking risk is no guarantee of success. For example, buying individual shares in a company could reap rich rewards if the company does very well, but you risk losing everything if it goes bust.