7.1.7 Risk tolerance — it's about you

From Financial Consumer Agency of Canada

Risk tells you about an investment. Risk tolerance is about you. It's how comfortable you are with not knowing what you will make from your investments, and how well you can live with losses if your investments lose value.

If you're like most people, you want the greatest return on your investment that you can get. But higher return means higher risk. You may be unwilling to risk your money for many good reasons:

  • If you'll end up worrying about your investments all the time, the worry might not be worth the higher return.
  • If you don't have time to ride out the ups and downs of normal financial cycles, a steady investment that produces lower returns may be what you need.
  • If you need your money for an essential purchase or for day-to-day expenses, you may not want to risk losing any of it, even for a short time.

On the other hand, if you've got a job and an emergency fund saved up, you may be willing to risk losing some investment funds in order to get a higher return. With time, you'll have a chance to rebuild your savings if necessary.

What's your risk tolerance? Take the following self-test to find out.

My tolerance for risk

1. When I think of my personal and family situation (my age, retirement plans, dependants, etc.), I feel I should: (required)
2. Considering my current financial situation (my income, job security, debt, savings, etc.), I could afford to see the value of my investments fall temporarily if I had to: (required)
3. Given several different investment choices, I would choose the one that: (required)
4. The portion of my portfolio that I would like to have in high risk/high return investments is: (required)
5. One of two remaining tickets is the winning lottery ticket for $1,000,000, and the other is a losing ticket. If I owned one of the tickets, I would: (required)
6. If a television game show offered me the three following choices, the one I would choose is: (required)
7. When I invest, I want my portfolio to grow as follows: (required)
8. When you’re young, it's important to try for the largest growth rate possible in your investments, because if you lose, you have enough time to rebuild your portfolio: (required)

To find out about different types of investments that fit into each risk level, and how to balance your portfolio while meeting your tolerance for risk, see the section on Types of investments. Talk to a financial advisor when you consider what investments best suit your needs.

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