Posted on Jun 1, 2012

If someone tried to guess your age, she could get a clue by looking at you … or by looking at your investment account.

And no, we’re not talking about the fact that the more money you have in your account, the older you are (though we hope thats the case!). We’re talking about the actual investments you hold – they are like a Rorschach test for your age. Why? Because of this little thing called risk.

Quite simply, the more risk you take on, the higher the potential returns. So shouldn’t everyone have high-risk portfolios to earn more money? Nope! Your risk profile depends on two things:

• When you plan on using the money: A portfolio with lower risk investments will probably grow slower, but it will also likely shrink less if the stock market goes down. So if you’re planning on retiring or buying a house in the next five years, for example, you should go with a low-risk portfolio so you won’t be forced to delay your retirement or buy a smaller house than you want if the stock market drops. But if your retirement is decades away, you have no other plans for that money and the stock market dips, you can afford to wait until it goes back up, and can have higher-risk investments that could net you larger gains in the long run.Everyone should invest for retirement, so the number of years you have till retirement will determine your risk tolerance for your retirement portfolio. Sometimes people invest in order to grow money for a down payment on a home or to live on during grad school. So, your risk profile for that part of your portfolio could look quite different, depending on when you plan to use the money.
• How comfortable you are with market swings: This is what’s called personal risk tolerance, and here’s where personality comes into play. For example, if you think you’ll find yourself obsessively checking the value of your account and will be tempted to sell your positions if the stock market dips (which means you’ll sell at lower prices and possibly lock in losses), you will want to have a lower risk profile. But if you’re cool as a cucumber and can brush aside panicked stock market news, you can take on more risk.

There are four risk profiles. At any given time you might have more than one profile if you have more than one investing goal and each has a different timeframe. For instance, if youre 30 and want to put a down payment on your next home in five years, your investing profile for the down payment may be extra cautious, while your risk profile for your retirement money is aggressive. Here are the four types:

1. Extra Cautious: A careful investor wants to get the returns from investing, but also wants to preserve her money. She gets nervous easily with dips in the stock market because she knows she’ll need to access to her money in five years or less for retirement or another goal, like buying a house or starting a business.
2. Cautious: A cautious investor can afford to take a little more risk. She’s comfortable with small dips in the market and won’t need to access her money for at least ten years. When it comes to her retirement money, she may be in her 50s.
3. Assertive: An assertive investor will take on more risk in order to grow her money. She doesn’t get nervous easily about drops in the stock market and/or won’t need to access her money for at least 20 years. When it comes to her retirement money, she may be be in her 40s.
4. Aggressive: An aggressive investor is willing to take on a big (but still sensible) risk in order to increase her long-term gains. She doesn’t get nervous when the stock market drops because she knows she won’t need to access her money for at least 30 years or more. When it comes to her retirement money, she may be in her 20s or 30s.

Take our quiz—which will measure your risk tolerance, take into account when you want your money and how long until you plan on retiring—to find out your risk profile: