Are you more inclined to risk your cash for a big return or to stash it under a mattress? Nicole Pederson-McKinnon helps you decide.

Are you a slip, slop, slap or coconut oil kind of person? At a famous bungee jump, are you looking or leaping? Do sharks keep you on the beach – or does the extra rush make the board-ride even better?

Money can similarly polarise people. And they might even be couples co-investing in joint pursuit of a comfortable future. I can call your tolerance for risk your sleep-at-night quotient. Just how much risk – which you can really think of as the potential to lose money – you can handle without turning into an insomniac.

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A number of factors will shape this: nature, nurture, and need. We’re born with a certain inbuilt propensity for excitement and danger, which could equally consider risk. That’s “nature”.

You’ll also have a learned propensity for excitement and danger, shaped and honed through your observation and experience of money and investment. Your parents’ influence, the way they dealt with it and when and how they exposed you to the concepts, was probably key. Financial stress, anxiety, foolhardiness, debt dependence – we unintentionally absorb or actively repel our parents’ economic attitudes. Behold “nurture”.

And you’ll be contending with external factors that temper and may even override the previous two risk influencers. How old are you? How much money do you need? How soon do you need it? Yes “need”.

These three vital factors will determine the right investments for you.

If you’re already thinking “shares are too risky for me”, you may be entirely wrong.

Yes, the credit crack-up was confronting, but you need growth assets such as shares and property to reach your goals. The key is to balance these with more stable, income-producing assets.

The fortunes of markets can turn on the head of a pin (witness share recoveries of 20 per cent in some 12-month periods in the years after the financial crisis) and you need to be invested to benefit.

More importantly though, if you have a safe, appropriate mix of investments in the first place, market fluctuations shouldn’t hurt you too much and it should be easier to psychologically cope.

Take this quick quiz to size up your investment style.


Take the “Pillow Test” to give you some indication of how much excitement you can handle…and the ideal investment mix for you.

1. Think about the last time the sharemarket fell and sensationalist headlines screamed: “$50 billion wiped off the market.” How did it make you feel?

a. Like the New Year sales has come early

b. Glad you could pick up some bank stock more cheaply

c. Confused – why don’t journalists talk in percentages so people know how bad it actually is?

d. Happy that you hadn’t invested in the first place

2. Your main hope for the money you invest is to…

a. Make chunky after-tax returns

b. Chalk up steady gains that outstrip inflation

c. Protect your hard-earned money from market ups and downs

d. Preserve your capital and maybe earn some income

3. If someone gave you a hot stock tip at a barbecue, you would…

a. Buy a bunch of that stock

b. Add a little to your portfolio

c. Make a mental note to investigate it

d. Back away

4. How would you feel if an investment you made didn’t surge as expected?

a. Ready to roll the dice again

b. Philosophical – you knew there was a risk

c. Disappointed

d. Cheated

5. What would you do if shares you owned fell 20 per cent overnight?

a. Buy more as fast as you could

b. Shrug – they’re a long-term investment anyway

c. Cut some of your losses

d. Panic and sell the lot

6. What annual return do you want and need on your capital?

a. More than 10 per cent

b. 9 to 10 per cent

c. 6 to 8 per cent

d. 5 per cent or less

7. What do you think about superannuation?

a. Essential to my retirement but. just in case, I’m saving separately, too

b. It doesn’t cost me anything, so it’s all good

c. I’m thinking of salary sacrificing to enjoy the tax benefits

d. I’m relying on it to clear my credit card debt down the track

8. How old are you?

a. Under 31

b. 31 – 45

c. 46 – 65

d. 66 or above

9. How soon do you hope to stop working?

a. In 20 years or more

b. In 10 – 19 years

c. In 5 – 9 years

d. In 1 – 4 years

10. Would you say your personal motto is:

a. YOLO: You Only Live Once

b. Just enjoy life

c. A dollar saved is a dollar earned

d. Good things come to those who wait



Give yourself four points each “a” you circled, three points each for each “b”, two for each “c” and one for each “d”. Then tally your results and see where they put you.


You are happiest if there’s a little chance of losing money. You just have to realise there’s also little chance of making much. Does this fit with your age and your ambitions for retirement?

Your Dream Asset Mix: Up to 30 per cent in growth assets (these are mainly shares and property) and the rest in interest-bearing assets (these are mainly bonds and cash).

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Because you are pretty keen to keep most of your cash, you’re prepared to accept more muted returns. Investments with potential for capital growth, but also income in case that growth doesn’t eventuate might set you up for the best.

Your Dream Asset Mix: Up to 50 per cent in growth assets and the rest in interest-bearing assets such as bonds and cash.


You can cope with a bit of short-term volatility if it brings you long-term capital growth. You probably don’t care much about income as an investment priority at this stage.

Your Dream Asset Mix: Up to 70 per cent in growth assets and the rest in interest-bearing assets such as bonds and cash. (Note: More than 80 per cent of Australians have their superannuation in a “balanced” managed fund split in this way. For younger people, however, it can be a better idea to invest in funds that hold a higher proportion of growth assets as there are assets that, although risky in the short term, make higher returns over the long term).


You want gang-buster investment returns and you are willing to take a fair amount of risk, and accept volatility that brings, to get them.

Your Dream Asset Mix: Up to 85 per cent in growth assets and the rest in interest-bearing assets such as bonds and cash.


Whatever you sleep-at-night formula, diversification will assist your slumber.

This means spreading your investments across the range of the asset classes mentioned above, so that a downturn in one will hopefully be cancelled out by gains in others. Think about whether they are really spread, too. If you have a home, an investment property or two, and a bunch of cash in mortgage trusts, you really hold only one type of asset – property. So that means you are vulnerable to a cyclical downturn in that asset.

You should also invest in different sectors within each asset class. For example, a spread of shares including resources, banking and, say, technology stocks, and not just residential, but also commercial property.

Finally, you need to consider the geographical bias in your portfolio. Australia represents only 2 per cent of the world’s market. Besides, if every one of your assets is in the one country, you are incredibly exposed to  a local economic downturn.


Thorough risk profiling is rather more complex than this little exercise suggests. In fact, there is an entire academics discipline – psychometrics –  dedicated to such psychological testing.

You should also bear in mind that in most risk questionnaires, people come out as more risk-averse than they can afford to be. Remember: you need to be well-rested and achieve your investment objectives.

Although a risk-free return of 5 per cent might sound appealing, it won’t be much good if you actually need 8 per cent to be able to retire when you would like.

So you have to balance psychology with necessity.

In a nutshell, if you are investing for the long term, you will need more exposure to growth assets; if you are investing for the short term, you will need more exposure to interest-bearing and other assets.

Once you have split your portfolio among the asset classes (then split it further among a big enough selection to investments within those assets), you need to do your best to leave it there. Not necessarily in particular investments but definitely – until your risk profile changes – in the assets. Then sleep easy.




The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.



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