When it comes to designing an investment strategy, everyone isn’t the same. Your investor personality is unique, as is your risk tolerance. You may be OK with rolling the dice on startup companies and volatile emerging markets with nary a blink; someone else may sleep easy at night only if he or she is in stable but slower-growing sectors. But even conservative investors are taking a big risk because there’s also a chance that slow-growth earnings may not yield high enough returns to meet their saving or retirement goals. “People who are unable or unwilling to take any financial risks are basically locking themselves into very low rates of return,” says John Grable, Ph.D., a professor of financial planning at the University of Georgia. “The only way to accumulate wealth in your lifetime is to be willing to take a little more risk and to have a long-term perspective.”
So where do you fall in the risk spectrum? Take the quiz below to find out whether you’re pretty aggressive, very cautious or somewhere in between. This will help you determine the investment mix that’s best for you.
Tally your “yes” answers to the following questions:
1. If you invested $10,000 in mutual funds and lost more than half of it, would you find extra money to invest more in the market?
2. Would you hold money in a down market?
3. Are you investing for a distant retirement?
4. Do you rarely check the balance in your portfolio?
5. Would you quit your job if you didn’t have another one?
6. Do you visit casinos on a regular basis?
7. If you were a game show contestant and offered either $1,000 in cash or a 5-percent chance of winning $100,000, would you take your chances on the $100,000?
8. Would you take a planned vacation if you’d just lost your job?
9. Would your best friend describe you as a real gambler?
10. If a stranger on the Internet contacted you and offered you a lot of money, would you respond?
11. Would you start your own business?
12. Would you change career fields late in life?
13. Do you read a lot of books, magazines and blogs and watch a lot of TV shows about the stock market?
14. If experts were predicting that prices of assets such as gold, jewels, collectibles and real estate (i.e., hard assets) were to increase in value, would you invest?
15. With regard to best- and worst-case investment returns, would you prefer the chance of a $4,800 best-case gain and a $2,400 worst-case loss to a $200 best-case gain and a $0 worst-case gain/loss?
If you said “YES” to:
1 to 5 questions More than likely you’re risk averse. Ray Mignone, CFP, of Little Neck, N.Y., recommends sticking with large cap stocks. “Put a little money into the market each month until you get up to the percentage of risky investments that make you comfortable,” he says.
6 to 10 questions
You may be at a moderate risk level. Mignone recommends having at least 30 to 40 percent of your investments in the stock market and the rest in short-term bonds. A few well-balanced mutual funds also work well for this type of investor.
11 to 15 questions
You’re probably open to risk. Rebalance your portfolio at least once a year, advises Mignone, to review your risk levels. “If you started with 60 percent stocks and 40 percent bonds and the market is up a bit, you may want to rebalance.”
To get your full investor personality profile, meet with a Certified Financial Planner to discuss your time frame and objectives. Visit cfp.net or letsmakeaplan.org. For a more in-depth risk tolerance questionnaire, visit njaes.rutgers.edu/money/riskquiz/.