Today I learned:

1. Everything I Know About Risk Tolerance I Learned in the Kitchen: I recently met with an investment advisor and to kick-off the meeting he walked me through a Risk Tolerance assessment. You know the test – it is the same one you are required to run through at the bank every time you change your RRSP portfolio. I assume this holds true for your 401K in the U.S. too.

Having done this quiz a number of times, it got me thinking: Is there a more creative way to tackle this subject?

Without any immediate ideas I dropped it until the other day.

I arrived home from work to find my wife and four year-old daughter making chocolate chip cookies. I came in at the perfect time. The hard labour was done – all that was left was to lick the spoon and put the trays in the oven.

After a failed attempt to wrestle the spoon from my daughter I was faced with a simple decision.  I could wait 9 minutes for the cookies, or I could dig in to the uncooked dough immediately.

For me, that decision is simple: Eat the cookie dough.

After eating a couple cookies worth of dough I started to think about my decision. Other than the obvious – I have more than a bit of a sweet tooth – could I learn anything from my behaviour?

I realized that given the choice to eat chocolate chip cookie dough now, or wait 9 minutes for what will hopefully become the perfect combination of crispy chocolatey goodness, I will always go with the dough.

Why?  I know the cookie dough will be good, now. I also know that if executed properly the finished product will be better. The problem is that so, so, so many things can go wrong.  A kid might need to go pee. I might get distracted by an incoming email. Don’t even get me started on telemarketers.  Nine minutes could easily become twelve, and all will be lost.

It is about risk. And when it comes to cookies, my tolerance is pretty low.

2. Analyis of Risk – The Cookie Dough Method: The above baking-based self-assessment made me wonder, does my dough-first strategy translate to other aspects of my life? My investment strategy?

The Cookie Dough Method for Analysis of Risk Tolerance was born. Or, I guess, baked.

Do you think your approach to baking cookies can predict your risk tolerance in investing? Take a nibble on my quiz to find out…

Take the Survey

A. Your age is:

1. Under 18 (If your mom does not let you use the oven alone please navigate to this page now.)
2. 19- 64
3. 65 or over (Cookies should not be a prominent part of your diet and will wreak havoc on your cholesterol. Navigate here.)

B. You are headed out to buy the ingredients for a batch of cookies. Do you:

1. Methodically record all the requirements from a recipe card you got from your mom, which she got from her mom?
2. Arrive at the store and then shop for what need based on the recipe they put on the bag of Chipits.
3. Wing it. You can borrow from your neighbours if you forget eggs or sugar.

C. Your oven is:

1. In tip-top shape. You have it serviced annually.
2. A professional, model. You installed because it matches my fridge. You don’t really know how to use it.
3. Oven? You prefer to cook over an open fire in your backyard.

D. You are responsible for:

1. Providing cookies for yourself, and probably a husband/wife and kid or two one day.
2. Providing cookies for yourself, your spouse, your ex-spouse, all the kids and three generations of elders.
3. Responsible?

E. It is Sunday and you invest 2 hours making a batch of cookies for your kid’s birthday party. Your oven thermostat breaks and they are all ruined. You:

1. Pay a weekend night service charge to get things fixed before you bake again.
.
2. Go to the bakery and buy whatever is recommended.
3. Take another kick at it.  You’ll guess right this time.

F. The timer is about to go off and the phone rings. You:

1. How could it ring? You planned ahead and turned the ringer off.
2. Call screen and answer if if sounds interesting.
3. Answer it and agree to a survey that will take “about 5 minutes.”

G. How would you describe your overall cookie status?

1. I already have a cupboard full in case we have visitors.
2. I have been known to take all my cookies and invest them in one of those Christmas time cookie exchanges where people try to show up with raisin-based “cookies” and then trade up.
3. I live cookie to cookie.

Results

Total the value of all responses:

Score 7-8: You are a lot like me. You have a low tolerance for risk and must consider this in both your baking and investment strategies. You should consider safe investments. Oreos for example. Start with the bulk of your portfolio in short to medium term bonds and pre-made Pillsbury dough. The rest of your portfolio should go into highly diversified, large cap stocks and Girl Guide Cookies.  Tinker with home made recipes but save some chipits for mom’s recipe.

Score 9-15: You have a moderate risk tolerance, and may want to consider learning more about investment strategies and recipe development. You might consider a portfolio that is anchored by an index fund, and something from a bake sale. You could probably handle a good chunk of cash invested in fruit (e.g. AAPL) or other natural resources. Every once in awhile you’ll burn your cookies, and your capital, but in the long run you should have enough around to at least enjoy the crumbs.

Score >15: You have a high tolerance for risk.  You have never even tasted cookie dough.  In this economy, if you want to retire with a full cupboard one day, you need to marry a rich chef.

Real-Life Application

I am working on a full online and interactive version that will allow you to take your results straight to the bank, to skip their annoying questions and save time in the investment process (Note: I am not really doing that, and if you thought I actually was, click here.)

Obviously (or at least I hope it is obvious) this was meant as a joke. That said, I do see some applications for this type of thought process. As my kids grow up, I foresee difficulty trying to teach lessons like planning for retirement and the time value of money. Trying to get kids to think about what they want in an investment strategy is tough, but with a bit of creativity maybe we can teach them the same lessons through real-life application.  ”Come on kids, Daddy wants to talk about RRSP’s. We’re going to bake a cake…“

Comments?

So, what’s your risk tolerance?  Do you steal from the tray or wait patiently until they are done? Do you keep a close eye on the process (READ: stare eagerly through the window with mouth watering and the oven light on) or just trust that things will work out in the end? Do you ever open the door early just to check if they are done?

As well, any other ideas on how to apply this type of thinking to teaching kids or others about money?