How to Determine Your Risk Tolerance in Investing

The question “What is your risk tolerance?” serves as a guiding principle that helps you decide on  the following:

• What types of assets to invest in
• How much to allocate to each asset class
• When to rebalance or hold your position

Understanding risk appetite vs. risk tolerance is also helpful here. Risk appetite is the amount of risk you’re willing to take, while risk tolerance is the amount of risk you can realistically handle. Both should be aligned with your financial goals.

How to Assess Risk Tolerance

Now that you understand what affects your comfort with risk, let’s talk about how to determine your risk tolerance in investing. It all starts with honest self-reflection.

Below are five key questions you can ask yourself—along with concrete ways to answer them.

1. What is your income, and how consistent is it?

Start by reviewing your monthly cash flow. Track your salary, side income, and business earnings. Is your income fixed and stable, or variable and unpredictable?

• If your income is consistent and exceeds your expenses, you may have the flexibility to take on more risk.
• If it’s unpredictable or barely covers essentials, you may prefer safer, lower-volatility investments like bonds or savings accounts.

Use a budgeting app or spreadsheet to map out your income and expenses to give you a clearer view of your financial safety net.

2. What is your investment goal, and when do you need the money?

Ask yourself why you're investing. Is it for early retirement? A house in five years? Your child’s college fund? Short-term vs. long-term investment goals should guide how much risk you can take. The longer your time horizon, the more risk you may afford.

Set a timeline for each goal. Label it as short-, medium-, or long-term. Then match each with the appropriate level of risk: stocks for long-term, mutual funds or index funds for medium, and time deposits or conservative funds for short-term.

3. How would you react if your investments lost 20% in one year?

Imagine opening your investment account and seeing a 20% dip. Would you panic and withdraw? Hold steady? Buy more? This question tests your risk appetite and your instinctive response to volatility.

Reflect on past experiences. Have you ever pulled out of an investment too soon or stayed calm during a dip? If you're unsure, start small. Invest in a volatile asset and monitor your reaction. This helps you build emotional awareness over time.

4. What is your experience with investing and market volatility?

If you’ve never invested before, your natural risk tolerance may be lower. But experience builds confidence. More seasoned investors tend to understand that markets recover, and that losses on paper aren’t realized until the asset is sold.

Educate yourself. Read up on market cycles or follow real-time stock or investments in the Philippines for a few months before investing. You can also speak with a bank relationship manager to understand what to expect during periods of upswings and downturns.

5. What kind of returns do you expect, and how much loss can you accept along the way?

High returns usually come with high risk. If you're aiming for 10%+ returns annually, understand that the path can be challenging. The key is to strike a balance between ambition and reality.

Write down your target return. Then, research which asset classes have historically delivered those returns. Ask yourself if you’re fine with the short-term losses they sometimes bring. If not, scale back and adjust your expectations.

Risk tolerance isn’t just about gut feeling. It’s something you can measure. The most objective way to calculate risk tolerance is to use actual financial data. That’s why many financial experts recommend using tools or formulas that give you a precise view.

We recommend using a risk assessment tool. These questionnaires usually take into account your income, age, financial goals, time horizon, and reaction to market changes. Once completed, you’ll get a numerical score or risk profile—typically categorized as conservative, moderate, or aggressive. This score gives you a practical starting point.

Next, compare the result with your actual investing behavior. Doing so helps fine-tune your strategy, so your risk appetite and tolerance align with your investment plan.

Maximize ROI by Knowing Your Risk Tolerance

Whether you're investing in stocks, bonds, REITs, or other investment vehicles, aligning your strategy with your risk tolerance helps you stay the course—even when the market gets bumpy.

Take a self-assessment today and start building a portfolio that feels right for you! If you prefer more personalized guidance, speak with a bank relationship manager. They can teach you how to determine your risk tolerance for investing and recommend investments that fit your profile.