Risk Tolerance

Contents

• Overview
• Outputs
• How to use it

Overview

Risk Tolerance is an investor's long-term psychological willingness to trade-off risk and return and it is the starting point for establishing the right level of risk to take with Investible Assets over the long-term.

The Risk Tolerance assessment places investors into categories relative to the baseline investor population. The results typically follow a normal distribution so you can expect more medium risk investors and less lower and higher risk investors.  

 The assessment follows a psychometric approach based on leading scientific and behavioural finance principles. Studies show this is the only accurate and robust way of measuring investors’ Risk Tolerance which means you can be confident in the outputs. 

 The questions are designed to be easy to understand so we deliberately avoid questions which test mathematical ability or require a deep knowledge of investments. There are no right or wrong answers and you should encourage investors not to over think the answers and to go with their gut response. 

Outputs

The Risk Tolerance assessment places investors into 5 categories from Low to High. But we are sometimes asked to provide 7 Risk Tolerance categories in which case we add a Very Low and Very High category. 

Very Low 1/7	You have very low risk tolerance, which means you tend to be highly conservative with money, and prefer security over the possibility of growth.
Low 1/5 or 2/7	You have low risk tolerance, which means you tend to be conservative taking financial risks. People with low risk tolerance are most comfortable when their total wealth is mostly protected against the possibility of poor long-term outcomes, even if that means lower returns. The suitable level of risk for your investible assets also depends on your risk capacity.
Medium Low 2/5 or 3/7	You have medium-low risk tolerance, which means you tend to be cautious taking financial risks. People with medium-low risk t​​tolerance want their total wealth to grow, but they are reluctant to accept a substantial possibility of poor long-term outcomes. The suitable level of risk for your investible assets also depends on your risk capacity.​​
Medium  3/5 or 4/7	You have medium risk tolerance, which means you take a balanced approach taking financial risks. People with medium risk tolerance neither seek nor avoid financial risk, and they are prepared to accept uncertainty if it means they are likely to make a decent return on their total wealth. The suitable level of risk for your investible assets also depends on your risk capacity.
Medium High 4/5 or 5/7	You have medium-high risk tolerance, which means you tend to be assertive taking financial risks. People with medium-high risk tolerance want to grow their total wealth over the long term, and are willing to accept the risk of poor outcomes to do so. The suitable level of risk for your investible assets also depends on your risk capacity.
High 5/5 or 6/7	You have high risk tolerance, which means you tend to be ambitious taking financial risks. People with high risk tolerance are comfortable accepting the risk of getting less than they wanted if there is a chance of getting much more than they hoped. The suitable level of risk for your investible assets also depends on your risk capacity.
Very High 7/7	You have very high risk tolerance, which means you tend to be adventurous taking financial risks. People with very high risk tolerance are comfortable accepting the risk of getting less than they wanted if there is a chance of getting much more than they hoped. The suit​able level of risk for your investible assets also depends on your risk capacity.​​

How to use it

Risk Tolerance is the starting point for establishing the right level of risk for investors to take with their Investible Assets. 

But you should consider investors’ Risk Capacity (or Capacity for Loss), their Knowledge and Experience and Composure when selecting the Suitable Risk Level (the right level of risk to take with Investible Assets, also known as Risk level on our API documentation). 

We talk more about how Risk Capacity, Composure and Knowledge and Experience impact investors’ Suitable Risk level in the following sections.