Take The FinaMetrica Risk Profile Test Free

As I’ve written before, determining your risk tolerance is the first and most important step when it comes to deciding on an asset allocation (check out mine).  And this isn’t just a meaningless mind exercise:  estimate your risk tolerance to be too high and you’re likely to realize massive losses selling out at the bottom of market panics (sound familiar).  Underestimate your true risk tolerance, on the other hand, and you risk running out of money in retirement because your conservative portfolio of bonds and cash didn’t generate the returns necessary to sustain your comfortable lifestyle indefinitely, even though you presumably saved “enough.”

So how exactly does one go about determining one’s risk tolerance?  Well, it’s not easy, but there are tools out there to help you get started.  I came across a new one the other day called the FinaMetrica Risk Profile Test, which yielded some interesting results.

The FinaMetrica Risk Profile Test

The FinaMetrica Risk Profile Test is a new kid on the block, from what I can tell.  The test is free as of this writing (until 11/30/2009) and takes about 10-15 minutes to complete.  It’s composed of 25 questions covering a variety of risk-taking scenarios designed to determine your appetite for taking risk.  It doesn’t require any personal information to take save your name and email address (but what doesn’t require those, these days?)

At the end, the questionnaire will ask you what you think your risk tolerance will be on a score of 0-100 with 100 being most risk-tolerant and 0 being most risk-averse.  The average score is 50 with a standard deviation of 10.  I guessed my risk tolerance would probably come in at about 70 (above-average but not too crazy) but my actual score was 83, which means I am supposedly more risk-tolerant than 99.9% of respondents.

Do I think my score is accurate?  At first glance I didn’t, but after thinking about it I realized the vast majority of Americans are ultra-conservative merely because they don’t understand how the market works.  As they learn more about how the market works and various forms of risk management (diversification being the main one), people tend to become more risk tolerant, to a certain extent.

While I don’t recommend you take your results and make massive changes to your portfolio, you might find out you are more or less risk tolerant than you previously thought.  Or you may be inspired to consider at how your investments fit into the broader context of your life from a different angle.  Either way, it couldn’t hurt.  So what’s your risk tolerance?  Take the test and find out.