Understanding yourself is the key to making sound financial decisions. What kind of person I am? What kind of ambitions I have in terms of "making my money work"? Knowing this requires a lot of introspection.
A risk profiler has tools that map your risk apetite. Some links are here below.
http://wealth.moneycontrol.com/jtrisks.php
http://myiris.com/mutual/riskProfile/index.php
But the catch with risk profiler is that they concentrate on positive cases. Think of negative scenarios when trying to map yourself. A person like me does not get nervous, when my stock portfolio dips by 50% or even 100%. In fact during the downturn (much to my wife's and parent's nervousness), I was buying more stocks. However, not everyone is risk taking. And I would suggest if you are not, don't try things that would impact your health and create nervousness around you. An analogy is around buying cars. I cannot buy a luxury car. Reason, if there is a scratch on my car, I cannot sleep. The more expensive the car, the more days are lost in thinking about the scratch. Hence I stick to less expensive ones.
Knowing yourself will help tune your portfolio to rewards that make sense to you. If you dont like taking risks, stick to an average 15% return portfolio. If you like taking them try a 30%+ return portfolio, but be prepared for the roller coaster ride. An important step in doing your profile is also to check with your spouse and his/her comfort level. A better idea would be to take an average risk the two if you invest jointly.
The questions you should have answered are
1. What kind of returns you expect on investments
2. Does negative news over your wealth make you lose sleep?
As far as I am concerned, I go by the old gujju saying "In the medium term we all need to make money, in the long term we all die"... happy thinking!!
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