X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
1 Simple Situation to Test Your Attitude to Financial Risk - Outside View by PersonalFN
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

1 Simple Situation to Test Your Attitude to Financial Risk
Aug 22, 2012

There are many simple questions that can assess a person's general risk taking behavior. These will tend to cover risk appetite, but not often touch upon risk tolerance. These include even questions such as:

  • Have you at any time engaged in, or wanted to engage in adventure sports such as bungee jumping, sky diving, scuba diving etc?
  • Are your passengers always comfortable in your car with you driving or do you sometimes drive too fast or rashly for their liking?
  • Do you seek new experiences? Are you susceptible to boredom and seeking new ways to keep life interesting?
Answers to simple questions like these can help determine your risk appetite in life in general.

Now, consider this situation that will show how your risk appetite in life in general translates to your risk appetite regarding money:

Your friend offers you a deal. You flip a coin and if it comes up heads, you will win Rs. 200.

If it comes up tails, you win nothing, you lose nothing. You remain neutral.

If you decide to not play, your friend will give you Rs. 100 and the game is over.

Now, depending on your thinking, you will find one choice the obvious one.

If you are a risk seeker:
You will play the game. After all, it's a win-win situation. If it comes up heads, you make Rs. 200. If it comes up tails, you lose nothing.

In your mind, you reject the un-exciting option of making Rs. 100 for doing nothing, and choose the game instead.

If your equity portfolio falls during a period of market volatility, you are likely to buy more, without necessarily ascertaining whether the fund you are investing more into is a worthy fund or not, or whether your life goals are far enough away for you to add in more equity exposure to your portfolio.

If you are risk-averse:
You will not play the game. After all, it's win-win situation again. You are taking zero risk, not playing the game, and winning Rs. 100, guaranteed, for doing nothing.

In your mind, you reject the risky option of potentially making no money if the coin comes up tails, and would choose the guaranteed option of making Rs. 100.

If your equity mutual funds value drops during a period of market turbulence, most likely you will feel uneasy and could possibly make the classic mistake of selling low.

If you are risk-neutral:
Both the above situations will make sense to you, you see the benefits of both playing and not playing the game and would be neutral between the two.

Your attitude towards financial risk will be a large contributor to your level of financial health.

The more risk-seeking you are, the less healthy your financial portfolio is likely to be. However, it is also possible that if you combine risk-seeking behavior with the right research and advice, and you have a long enough time horizon to invest within, you will likely be wealthier, if not financially healthier, than a risk-averse person. This is, of course, within a common sense range of risk-seeking. An individual who actively and continuously takes bets is often nothing more than a gambler.

The more risk-averse you are, the healthier your financial portfolio is likely to be. It is likely that you will take calmer decisions, again, within a range of common sense, and will grow your wealth steadily, provided you have the right advice. And being risk-averse, it is also likely that you will seek out the right advice sooner than a risk-seeking individual.

If you would like to check your financial health, you can take the Financial Health Check created by PersonalFN.

Conclusion
Whichever type you are, one thing is common.

Your level of financial wealth will benefit from the right advice personalized to your own innate risk appetite. Your financial planner will be able assess your risk profile and explain to you how to go about building wealth keeping your risk profile in mind. Once you know what your profile is, you will also be able to assess your past financial behaviour and reactions to market movements, and prepare yourself better for any future volatility. This very simple exercise will make you a smarter, more aware investor.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "1 Simple Situation to Test Your Attitude to Financial Risk". Click here!

  

More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

More Views on News

Most Popular

Follow India's Super Investors to Make Big Money in the Market Crash(The 5 Minute Wrapup)

Feb 8, 2018

Has the sell-off in the markets left India's super investors unduly worried?

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

The Markets Want Your Money. Don't Give It to Them.(Smart Contrarian)

Feb 9, 2018

MFs are having a gala time taking money from over-eager investors and funneling it into equities. Smart investors, though, know better than to do that.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

Rising Dominance of Mutual Funds(Chart Of The Day)

Feb 8, 2018

Domestic money flow into Indian equities surpassed foreign fund flows in the recent years. But will it continue in volatile market?

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS