Complete our investment risk quiz to test your understanding of the riskiest investments out there—and to discover the ideal risk level for your investing temperament

As humans, we are bred to overreact, to dwell on or even brood over any hint of risk. And these days, there are always investment-related worries to occupy our minds. Sometimes for investors, this means worrying about high-risk investments that they’ve made.

You get a much better return on time spent if you devote less of it to worrying about (and in fact avoiding) high-risk investments, and more of it on developing an investment strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments (and cutting risk), and the structure and balance of your portfolio.

And to help you out, here’s an investment risk quiz:

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 A. Which of the following does not fall into the category of lower-risk stocks?

1. Blue-chip stocks
2. Over-the-counter stocks
3. Stocks with hidden assets
4. None of the above

You are correct if you answered 2.

Companies that trade on the U.S. over-the-counter market are said to trade as “pink sheet stocks,” a holdover from the days when the quotes for these stocks were printed on pink paper.

Companies that trade “pink sheets stocks” usually don’t have sufficient market caps, or enough shareholders, to meet most stock exchanges’ minimum criteria.

Over-the-counter stocks may at times seem to offer extraordinary opportunities, but this can be an expensive illusion. Most legitimate companies with substantial growth potential will want to leave the over-the-counter market as quickly as possible, and move to the major markets. This tilts the odds against you.

We’ve always stayed out of the over-the-counter market, and are likely to continue to stay out. There are just too many attractive buying opportunities in major markets where risk is lower and your chances of making money are much better.

B. True or False: You should be skeptical of companies that mainly grow through acquisitions when looking for lower-risk investments?

You are correct if you answered “True.”

Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safe investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.

Despite the risks, some acquisitions turn out hugely profitable. So, your safe investing strategy shouldn’t automatically discount companies that have grown through acquisitions. Just keep the risks in mind, and avoid companies that seem unaware of them.

C. You can find the best lower-risk investments by looking for…

1. Well-established companies to invest in
2. A company with manageable debt
3. A stock that can benefit from secular trends
4. All of the above

You are correct if you answered 4.

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.

Keep an eye on a company’s debt. It should be manageable. When bad times hit, debt-heavy companies go broke first. This is one of the best ways you can mitigate risk in your own growth investing strategy.

The best stocks should have the ability to profit from secular trends. These trends outlast ordinary business booms and busts, because they reflect ongoing social change. A growing middle class and rising environmental sentiment are just two examples of secular trends.

 D. Which sectors in the following list have the most risk?

1. Finance and Utilities
2. Manufacturing and Resources
3. Consumer and Finance
4. Resources and Consumer

You are correct if you answered 2.

Your portfolio strategy should begin with a fundamental piece of advice that we underline frequently: Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Finance and Utilities sectors generally involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

E. Good ways to mitigate risk include…

1. Balancing aggressive and conservative investments in your portfolio
2. Holding both value and growth stocks
3. Considering market outlook when making investment decisions
4. All of the above

You are correct if you answered 4.

Investors should balance aggressive and conservative investments in their portfolio, in line with investment objectives, and the market outlook. They should also hold some value, as well as some growth shares, in their portfolios.

And above all, avoid the urge to become more aggressive as prices rise and more conservative as prices fall.

How did you do on the investment risk quiz?

Using our three-part Successful Investor strategy to help lower risk should be a main takeaway from this investment risk quiz:

• Invest mainly in well-established, mostly dividend-paying companies;
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
• Downplay or avoid stocks in the broker/media limelight.

All investments carry some degree of risk. How have you been able to determine the amount of risk you can accept?

What is the riskiest investment you made, and how did it work out?