Investing is one of the best ways to build wealth, yet it is often seen as this incredible enigma. There is so much jargon, and fear surrounding investing, it is hard to feel like you have a firm grasp on it. Investing is often seen out of reach for many people, while they prefer to work hard and save.
Working hard and saving money are great things to do, but if you want to build wealth and beat the cost of inflation, investing is the way to go.
But there is no denying that there is an inherent risk to investing. The stock market can fluctuate in an instant and your portfolio can take a hit. While you don’t need a ton of money to get started with investing, there are factors in your financial life that affect your level of risk and can influence how much you should be investing. For example, you probably shouldn’t be investing all of your spare money if you have no emergency savings or are mired in debt.
However, your risk tolerance also factors in how comfortable you are with uncertainty and whether you like to play it safe or if you are more aggressive. It also takes into consideration your attitude towards investing as well as how much risk you can handle, considering your current financial reality and your financial goals. If you’re extra cautious, you may not see the massive gains that people who tend to have higher risk tolerance do.
If you want to assess your risk tolerance, check out the best online quizes I found to help you determine your level of risk.
According to their website, “This quiz was developed by two university personal finance professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia. By taking this quiz you will be contributing to a study on measuring financial risk tolerance. Your results will be recorded anonymously. We are not collecting any identifying information.”
This is a short, simple, and fun quiz! And I love that it is part of a study!
I love this quiz that Bankrate has created. It has some real-life scenarios and really gets to the heart of your attitude toward investing. It’s short and sweet at only 6 questions. When I took the test I actually got ‘least risk tolerant’ with the following advice, “Your low risk tolerance level is actually risky business! You're so wary of risk that you're missing out on aggressive investments, which you need to round out your portfolio. Aggressive investments preserve your money's purchasing power and over time add to your principal investment. As always, keep your investments diverse — you don't want to put all your eggs in one basket.” Currently, I’m focusing a lot on debt repayment over investing, so it sounds about right. But now I know what I need to do to change my situation.
LearnVest has some fantastic information on risk tolerance and how it affects each of us. They break down risk tolerance into four categories: extra cautious, cautious, assertive, and aggressive. For this quiz I actually got assertive, which surprised me — but they based that on me not needing my money for several decades, as I am not investing for a down payment on a house or for school.
Find out your risk tolerance level and learn more about each level.
This is a nice short quiz on CNN Money, but the bonus comes at the end! After you take the quiz, it tells you your personality type (I apparently crave balance), and you can check out their recommended asset allocation. I found that to be so helpful as they broke it all down for you in an easy-to-read format.
Check out these resources and report back: How risk tolerant are you?