How the Survey Risk Questions are Designed

The built-in risk questionnaire from HiddenLevers is a way to measure loss tolerance. To create this questionnaire, HiddenLevers sought to include the most ubiquitous questions among the current risk questionnaires used by advisors. By collecting the most common questions, and choosing the top ten, HiddenLevers is able to provide a brief, yet complete way to gauge a client's risk.

The question answers line up from most conservative to most aggressive. The categories are: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive.

The following question is based on returns of different investments:

The five categories are based on the following allocations:

• Most Aggressive: S&P Consumer Discretionary Index (Represented by XLY)
• Moderately Aggressive: 90% SPY / 10% AGG
• Moderate: 50% SPY / 50% AGG
• Moderately Conservative: 90% AGG / 10% SPY
• Conservative: Risk Free Investment paying 2%

To determine the potential risk and reward for these investments, HiddenLevers uses the average of the top and bottom three years for SPY since 1980. The same methodology was used with XLY, for years since 1990.

Because bonds have experienced a multi-decade bull market with falling interest rates, using best return years would not properly reflect the current rate environment. A different approach is used to determine the potential 1 year risk and reward of fixed income. HiddenLevers stress testing determined that AGG would fall 3.15% if the 10-Year US treasury note rose 100 basis points. Alternatively, if yield on the 10-Year US treasury note fell by 75 basis points, then AGG would rise 6.1%. These figures are based on stress tests run November 4, 2015. 

The results from these calculations are as follows:

• Most Aggressive: +$37,333 / -$26,000
• Moderately Aggressive: +$31,343 / -$21,425
• Moderate: +$20,123 / -$13,300
• Moderately Conservative: +$8,900 / -$5,180
• Conservative: +$2000 / -$0