What Type of Investor Are You? - dummies

By Colin Davidson

Part of Managed Funds For Dummies Cheat Sheet (Australian Edition)

Fund managers and financial advisers often provide risk-profile questionnaires to help you determine what type of investor you are, based on your tolerance to risk, investing timeframe and investment knowledge.

Knowing your investor profile is crucial to working out what type of investment suits you, although this awareness alone is no substitute for a financial plan from a qualified professional, as it cannot take into account all of your personal circumstances and financial needs. Here is a basic risk-profile questionnaire, similar to those the professionals use.

How to use the risk profiler

Using the risk profiler involves three steps:

  1. Complete the questionnaire.

    For each of the questions, choose the response you identify with most, with only one answer per question.

  2. Calculate your score.

    Beside each answer is the score it carries. Add the scores for your answers together to get your total score.

  3. Review the selection.

    Match your total score with its investor type, shown in the table at the end, to see if it reflects your attitude to risk. You may need to take into account other personal financial circumstances that may see you selecting a different type.

The risk-profile questionnaire

Take the time to think carefully through each of the questions, even if you’re only completing the questionnaire out of interest. Down the track you may decide the results could be a useful starting point for your investing journey.

  1. What do you want to achieve when you invest?
    1. An investment that does not fluctuate in value. (1)
    2. Keep the value of my investments with regular income on which to live. (2)
    3. Maintain regular income with some exposure to capital growth. (3)
    4. I’m not worried about income, just maximising the growth of my investments. (4)
  2. How long are you prepared to hold investments for?
    1. Two years or less. (1)
    2. Three to five years. (2)
    3. Six to ten years. (3)
    4. More than ten years. (4) 
  3. How would you react if your investments were to fall in value by 15 per cent over a one-year period?
    1. Help! Take all my money out and put it in a bank deposit account. (1)
    2. Take out some of my money and move it to a ‘safer’ investment strategy. (2)
    3. Wait until I recover the loss and then consider other investments. (3)
    4. Stick to my guns and follow the recommended strategy. (4)
    5. Wow! It’s 15 per cent cheaper to invest more money in the same investment. (5)
  4. What is your willingness to risk short-term losses for the prospect of higher long-term returns?
    1. Low. (1)
    2. Not sure. (2)
    3. Moderate. (3)
    4. High. (4)
  5. Choose the most appropriate response to the following statement: I am willing to experience the ups and downs of the market for the potential of greater returns.
    1. Strongly disagree. (1)
    2. Disagree. (2)
    3. Neither agree nor disagree. (3)
    4. Agree. (4)
    5. Strongly agree. (5)
  6. Choose the most appropriate response to the following statement: My main concern is security; keeping money safe is more important than earning high returns.
    1. Strongly disagree. (5)
    2. Disagree. (4)
    3. Neither agree nor disagree. (3)
    4. Agree. (2)
    5. Strongly agree. (1)
  7. When it comes to investing, how experienced do you think you are?
    1. Inexperienced — investing is a new experience for me. (1)
    2. Somewhat inexperienced — investing is fairly new to me. (2)
    3. Somewhat experienced — knowledgeable. (3)
    4. Experienced — I know the factors that make investments go up and down. (4)
    5. Very experienced — I do my own extensive research and have an excellent understanding of what factors affect investment performance. (5)
  8. How secure is your future income (such as from salary, pension or other investments)?
    1. Not secure. (1)
    2. Somewhat secure. (2)
    3. Fairly secure. (3)
    4. Very secure. (4) 
  9. How would you describe your current financial situation?
    1. Completely debt-free. (5)
    2. Mortgage-free but a few other obligations (such as credit card debt, education fees). (4)
    3. A reasonable mortgage but no other debt. (3)
    4. A mortgage and some obligations. (2)
    5. Up to my eyeballs in debt (such as a mortgage, credit card and/or margin loan). (1)

The scores

Now add up the scores for all of your answers and match the total score with the categories in the table to see what type of investor the questionnaire indicates you are. You may want to do some further research to find out the investing characteristics of these investor types and adjust the result, depending on your personal circumstances.

Risk Profile Scores and Investor Types
Total Score Investor Type
9–14 Defensive
15–21 Conservative
22–28 Balanced
29–35 Growth
36–41 Aggressive growth