A risk tolerance questionnaire is a tool that advisors have used for years to determine your level of investment risk tolerance and your capability for taking investment risk.
It goes something like this:
How would you describe your level of investment knowledge?
None
Some
Highly knowledgeable
What concerns you most about investing?
Losing my initial investment
Not having enough income when I retire
Unable to retire
I don't have any concerns
If your portfolio lost 25% of its value, what would be your response?
It wouldn’t bother me at all
I would lose sleep
I would sell all my shares
I wouldn’t know
Then you add up all your "points" and VOILA - you have your own personal portfolio allocation. They actually turn these answers into a number that references your “target portfolio”. Delusion.
This is an emotional test. It has nothing to do with objective investment advising. If you woke up on a Friday, birds are chirping, sun is shining, and someone asked you these questions, you may be optimistic about your answers. If you wake up on a Monday morning, birds will not shut up, its raining, and someone asked you these questions, you would probably have different answers.
The truth is, this is a way to bypass the real work it takes to determine your correct portfolio allocation. Flushing out your financial goals takes time and consideration. Your financial plan, your aspirations, will determine what the correct allocation is.
So, let me ask you the real question:
What is more important?
Your portfolio allocation
Achieving your financial goals