A collection of questions which is designed to assess how much risk an investor is willing to take. Risk tolerance is a component of the risk profiling process and helps select optimal investments.Take a Risk Tolerance Questionnaire
Diversified investments generally move higher, however there are temporary dips along the way. These dips aren't a problem unless an investor is unable to wait for the recovery. Risk tolerance questionnaires therefore ask questions which measure an investor's ability to wait or 'hold on' such as:
People are innately different as to how much risk they feel comfortable with but also how risky they perceive a situation to be. Risk tolerance questionnaires ask behavioral questions as to how the investor would react to a given gain or loss.
From our research we know how important financial literacy is for an investor's risk tolerance. People who understand markets feel less concerned during downturns because they feel confident that the recovery will eventually come. It is therefore common to include questions about how familiar people are with investing.
Risk profiling is more than just a questionnaire. It should be integrated into a stepped advisory approach.
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Once a questionnaire has been completed it will rank the investor in relation to the population. Predictions can then be made about the type of investments that this segment of the population typically finds comfortable and can hold onto through 'ups and downs'.
From here, the investor can combine the information about their 'comfort level' based on their risk tolerance, with other information such as their risk need and risk ability.
Once these three inputs have been considered and investments that meet the three requirements have been found, the optimal portfolio for this investor is achieved.
Follow the link for more information about how risk tolerance questionnaires work.