People often misjudge their tolerance for risk.
Every person has a different attitude to risk. Some can stomach it and even thrive on it. Others can't sleep at night if they're at risk of losing even a cent of their money.
What experts call "risk tolerance" is what the average member of the public might
call a money personality. Understanding where you sit in the matrix, can help ensure you fulfil your financial goals.
It's essential to know whether you're risk averse or a risk taker before planning your financial future and setting goals and strategies.
In fact, your risk tolerance is widely viewed as one of the most important factors guiding you towards successful investment. Understanding your risk tolerance is especially important for couples who don't necessarily sing from the same hymn sheet when it comes to their financial risk tolerance.
In investing there's always a tradeoff between risk and return. The more calculated risk you can take, the more likelihood you have of greater long-term
return.
More often than not people's risk profiles aren't what they expect. Men, for example, often think they're more risk tolerant than they really are and women can be the opposite.
If you get your risk tolerance wrong, you might find that your investment portfolio doesn't grow as fast as you think or grow big enough to retire on. To find out more about your own money personality or risk profile, it might be worth taking the money personality profiler test on the Sorted.org.nz website.
Other useful tests and questionnaires include Gurney's Moneymax® Financial Personality Profile on the website kathleengurney.com.
Australian-based risk profiling specialist FinaMetrica, which provides many New Zealand financial planners with computerbased risk profiling tools, has an online test aimed at members of the public called MyRiskTolerance.com.
Ultimately it's essential that you can use the results to your advantage. Many investors choose to get advice from experts such as financial planners or coaches for this.
