Determine your risk profile using our very own risk profile test and discover the investing style that best suits you. The test consists of two parts with 21 questions in total. You can find out more about how we developed the test and the methodology behind it in the article below.
What Is a Risk Profile?
Your risk profile looks at how much risk you can afford to take on as an investor. It’s a key part of determining the asset allocation in your investment portfolio. It tells you how to balance the asset classes you invest in, i.e. stocks vs. bonds, as well as the type of assets in each class, i.e. low-yield treasury or municipal bonds vs. high-yield, junk bonds.
About FinMasters’ Risk Profile Test
This risk profile test was developed by FinMasters. In writing our guide on how to calculate your risk profile, we’ve been reviewing a number of online risk profile tests. We felt that some key features were missing, so we’ve tried to provide something better.
Most other online tests don’t differentiate between your risk tolerance and your risk capacity. That makes it hard to tell how much of their results can be attributed to your psychological makeup and how much boils down to the reality of your financial situation. Our test tries to assess your risk profile based on both your risk tolerance and your risk capacity.
Risk Capacity vs. Risk Tolerance: What’s the Difference
Your risk tolerance looks at how psychologically comfortable you are with risk and loss. We measure it with the Grable & Lytton Risk Tolerance Scale (G/L-RTS) test, which has proven reliable and robust. This is why financial advisers, researchers, and consumers use it to assess willingness to engage in financially risky behavior.
As for your risk capacity, the test looks at your objective financial situation and tries to assess how much loss you can afford to take without excessive impact on your quality of life and financial future. This assessment is based on your age, your income, and your investment horizon, among other factors.
Another gripe we had with the majority of the online tests was that they used a linear model. They would score the questions you’ve answered and then just add the results. We felt that this muddied the picture because we believe that different factors should be weighed differently.
For instance, your age should play a larger role in calculating your risk profile than your investment experience. This is all the more pertinent when you are older and your main objective is capital preservation.
We created a test that takes these different weights into consideration.
We adjusted some of the weights according to American investors. For example, we adjusted the weights of the income question according to the average household income in the US as well as the average household spending. Consequently, the results of this test might be a bit inaccurate for our readers from other parts of the world.
Nevertheless, we have explained our entire methodology below, so if you want to adjust the weights according to your own country or region, feel free to do so, and please let us know how it works out. We’d be very interested in the results!
Risk Profile Test Methodology
To give you a final score, we multiply the results of the G/L-RTS with the multiplying factors given below.
The score of the G/L-RTS ranges from 13 to 47, with higher scores representing higher risk tolerances.
Here are the multiplying factors used with the risk capacity questions.
| Risk capacity question | Multiplying factor |
|---|---|
| Age | |
| 18-30 | 1 |
| 30-40 | 0.9 |
| 40-50 | 0.75 |
| 50-60 | 0.5 |
| 60+ | 0.2 |
| Total household Income* | |
| 200,000+ | 1.8 |
| 150,000-200,000 | 1.5 |
| 100,000-150,000 | 1.25 |
| 75,000-100,000 | 1.1 |
| 50,000-75,000 | 1 |
| 35,000-50,000 | 0.9 |
| 25,000-35,000 | 0.75 |
| 15,000-25,000 | 0.5 |
| <15,000 | 0.2 |
| Number of dependents | |
| 0 | 1 |
| 1 | 0.94 |
| 2 | 0.84 |
| 3 | 0.7 |
| 4 | 0.5 |
| Income stability | |
| Stable | 1.1 |
| Unstable | 0.8 |
| Income growth | |
| Growing by 6% or more | 1.15 |
| Growing by 4-6% | 1.05 |
| Growing by 2-4% | 1 |
| Stagnant | 0.8 |
| Shrinking | 0.5 |
| Investment horizon | |
| 1 year | 0.8 |
| 2-3 years | 0.9 |
| 3-7 years | 1.05 |
| 7 or more years | 1.3 |
| Expected return | |
| I want to crush the market | 1.5 |
| Do a bit better than the market | 1.2 |
| Match the market | 1 |
| Stay safe | 0.5 |
| Experience | |
| Very experienced | 1.2 |
| Some experience | 1.05 |
| Little experience | 0.9 |
| No experience | 0.8 |
| Knowledge | |
| Very knowledgeable | 1.2 |
| Somewhat knowledgeable | 1.05 |
| Little knowledge | 0.9 |
| No knowledge | 0.8 |
*The income factors are based on the mean income in the US as well as the average annual spending.
👉 Example calculation:
Let’s say someone scored 43 on the G/L-RTS.
Their answers to the risk capacity questions are as follows:
- 35 year old (0.9)
- 2 kids (0.84)
- Combined income of 93k (1.1)
- Wants to do a bit better than the market (1.2)
- Plans to invest for the long-term (1.3)
- No prior experience or knowledge of financial markets (0.8,0.8)
- Has a stable income and believes it should grow by 3% over the coming years (1.2, 0.9)
The amended score would be calculated like this:
43*0.9*0.84*1.1*1.2*1.3*0.8*0.8*1.2*0.9 = 38.55
You’ll notice that this person already has a high tolerance for risk, making them an aggressive investor by nature. Their personal circumstances push them back towards balance. This is largely because this individual is inexperienced and doesn’t know much about the stock market.
Risk Profile Test Results
This is how we broke the risk profiles down:
| Overall Score | Risk profile |
|---|---|
| 0-13 | Very conservative |
| 13-26 | Conservative |
| 26-39 | Balanced |
| 39-47 | Aggressive |
| 47+ | Very aggressive |
If you’re close to the boundary between two profiles you may wish to review both and design a hybrid investing style using elements of both categories.
View the descriptions of all risk profiles along with the recommended asset allocation and illustrative investment examples corresponding to each risk profile: Investment Risk Profile Examples
An Extra Word on the Risk Capacity Factors
If you want to understand how we came up with the risk capacity factors, let me explain. The main premise is that the difference between the tiers shouldn’t be constant. Let’s look at the age category as a primary example:
The main tiers are:
18-30 Tier 1
30-40 Tier 2
40-50 Tier 3
50-60 Tier 4
60+ Tier 5
The main benefit of investing is the potential for compounding gains. That’s why we decided to make the difference between each tier and the one that follows to be compounding as well.
Compounding Risk Capacity Tiers
Let’s start by assuming that the multiplying factor of tier 1 is 1.
This means that if you are between the ages of 18 to 30, your risk profile should match your risk tolerance. In fact, an argument can be made that the multiplying factor should be more than 1. This would mean that these are the years where you should be aggressive even if you aren’t naturally inclined to do so. However, let’s stick with a multiplying factor of 1 for now.
With that said, what about the multiplying factor for tier 2?
At 30-40 years, you should be starting to become more conservative, but you still have plenty of time to invest your money. So, a sensible multiplying factor is 0.9, urging you to be a bit more conservative than your risk tolerance would indicate.
This means that the difference between the multiplying factors of tier 1 and tier 2 is 0.1. As we mentioned above this difference has to increase.
For tier 3, we made the multiplying factor be 0.75.
This means that the difference between tier 2 and tier 3 is 0.15 or 0.1*1.5.
For tier 4, we set the multiplying factor at 0.5, which makes the difference between tier 3 and tier 4 0.25 or approximately 0.1*1.5*1.5.
Finally, we set tier 5 at 0.2.
This meant that the difference between tier 4 and tier 5 was 0.3 or approximately 0.1*1.5*1.5*1.5.
We applied this same exact logic to every category in the risk capacity section while making sure to maintain common sense and to double check whether the final numbers were reasonable or not.
