10 Must-Have Questions in a Risk Tolerance Questionnaire

risk tolerance questionnaire

What is a Risk Tolerance Questionnaire?

So, on your way home do you drive in the slow lane or high-speed lane? Every person who is asked this question will have a different propensity for risk.

A risk tolerance questionnaire consists of a set of survey questions that help an individual understand the nature of investment style and what kind of investor to better reflect their situation and any risk associated with the investments.

This questionnaire is designed to help you gain an in-depth understanding of your investment objectives, which in future serves as the foundation of your portfolio and guides the experts in the subject matter to make appropriate recommendations to you.

An individuals investment objective is based on multiple factors which include:

  • Time period
  • Financial goals one wishes to achieve
  • Risk Tolerance

risk tolerance questionnaire

Image Courtesy: Charles Schwab

It is important that you are transparent about all the above to build a robust financial portfolio. You need to first clearly define your financial goals (short-term and long-term). Short-term goals may include buying a car or going for an exotic vacation, long-term goals can be investing for your child’s education.

Your time period defines by when you want to achieve those goals. It could be in a year or 5 years or 10 years or more.

Risk is an unavoidable part of making an investment. Historically, higher investments were subjected to higher risks as the returns were higher. Therefore, it is important that you clearly define your risk tolerance, to prepare the most appropriate portfolio.

Following questions are a must-have in your risk tolerance questionnaire.

10 Must-Have Questions in Risk Tolerance Questionnaire

A. Investment Objectives

The purpose of this section is to help you understand your own take on risk and how willing are you to take greater risks for investments. Unless you are sure about the risk you want to take, you will not be able to plan ahead.

  1. What is your investment attitude?
  • Very conservative
  • Somewhat Conservative
  • Moderate
  • Somewhat Aggressive
  • Very Aggressive
  1. In how many years will you begin making withdrawals from your investment?
  • Less than a year
  • 1-2 years
  • 3-5 years
  • 6-9 years
  • 10-15 years
  • 15-25 years
  • More than 25 years
  1. Once you begin to make your withdrawals, how many years will you be making withdrawals?
  • Lump-sum
  • 1-2 years
  • 3-5 years
  • 6-9 years
  • 10-15 years
  • 15-25 years
  • More than 25 years 

B. Risk Tolerance

Investment decisions are usually determined by risk taken against the returns received. Risk is defined as possibly any loss to your portfolio or investment. To understand this following set of questions need to be asked:

  1. Protecting my portfolio is more important to me than high returns.
  • Strongly Agree
  • Agree
  • Neutral
  • Disagree
  • Strongly Disagree
  1. Keeping the above answer option in mind which of the following statements make the most sense to you?
  • I am willing to bare the consequences of a loss to maximize my returns.
  • I am concerned about losses along with returns.
  • To completely avoid losses is something I am more interested in
  1. Which of the following statements best describes your investment philosophy?
  • I feel comfortable with stable investments
  • I am willing to withstand some fluctuations in my investment
  • I am seeking substantial investment returns
  • I am seeking potentially high investment returns
  1.  What do you expect to be your next major expenditure?
  • Buying a house
  • Paying college tuition
  • Capitalizing a new business venture
  • Providing for my retirement
  1. Over the next few years, you expect the annual income to:
  • Stay the same
  • Grow moderately
  • Grow substantially
  • Decrease moderately
  • Decrease substantially
  1. Assuming that you want to invest in stocks, which one would you choose?
  • Companies with significant technological advancement but selling their stocks at a low price
  • Established well-known companies that have a potentially high rate of growth.
  • “Blue chip” stocks that pay the dividend
  • Other (Please specify)
  1.  Select the investment you currently have
  • Bonds and/or funds
  • Stocks and/or funds
  • Others (Please specify)

Advantages of Risk Tolerance Questionnaire

  1. Risk tolerance questionnaire helps in analyzing and exploring the long-neglected area of risk capacity. Through this questionnaire, an individual can understand his/her risk appetite. While many individuals will believe self-research is the best way to understand, but experts believe filling out a questionnaire can help you build a comprehensive portfolio.
  2. Asking the right questions have the ability to identify the risks simultaneously. With the right insight from a subject matter experts and the current tools that are developed these questionnaires are designed in a manner that the client portfolio is designed optimally.

Disadvantages of Risk Tolerance Questionnaire

  1. Although these questionnaires provide initial insight into a client’s financial goals, there is a major drawback to relying solely on them. The issue with the majority risk tolerance questionnaire is that their scope is quite narrow focusing almost entirely on the client’s risk appetite.
  2. This approach is unfortunately inadequate as risk tolerance is a more concrete matrix as it determines what type of deficit a client will be able to bounce back from. This questionnaire can only do the initial screening and not a thorough study of the client’s goals.
  3. The major disadvantage of risk tolerance questionnaire is that first agreement on a common set of terminology pertaining to risk tolerance (risk analysis, risk capacity, risk perception etc.)
  4. More factors need to be a part of the risk tolerance questionnaire apart from risk appetite, investment patterns. Without this, it becomes both difficult and complex how to fit the information together to create a good recommendation.
  5. How the risk tolerance questionnaire is designed also plays a major role. Ironically many of the questionnaires are so poorly designed that they defeat the entire purpose of creating a questionnaire, which is to collect robust data that can be put to use for making well-informed decisions.