When you think about investments, the two most important questions to ask yourself are
“What is my time frame for this money?”
“What is my risk tolerance?”
When you stop and think about risk tolerance and turn off all the outside noise that makes you worry senselessly and is out of your control (i.e. situation in Ireland or amount of money China is lending), you actually know your risk level. The key is to tap into your intuitiveness and don’t think about it on financial terms. Think about it instead personally.
A great place to start is just by asking yourself important (and fun) questions (some questions are from a RUTGERS study). When looking at your answers, your risk tolerance usually becomes apparent and some of us end up surprised! There are also 5 important risk categories to see which you fit in!
Which of these do you consider risky?
Talking on your cell phone while drivingSkydivingBike riding without a helmetBuying an item in a store with no return policySkiing black double diamond runEating sushi
Questions:
1) Do your friends describe you as gamblers or cautious?
2) You have just finished saving for a "once-in-a-lifetime" vacation. Three weeks before you plan to leave, you lose your job. You would:
Cancel the vacationTake a much more modest vacationKeep the trip! You need to prepare for a job searchExtend your vacation this might be your last chance to go first-class
3) Your tax refund check of $2,000 just arrived, what would you do?
Invest it.Deposit it in a bank account.Saks is having a sale – here I come!
4) You just inherited $100,000 from an old dear aunt. She stipulated that you must invest ALL the money in ONE of the following choices. Which one would you select?
A savings account or money market mutual fund A mutual fund that owns stocks and bonds A portfolio of 15 common stocks Commodities like gold, silver, and oil
5 Risk Categories.
The key here is to see what you could LOSE in a DOWN market and how that feels. Don’t look at the UP market, that’s too easy.
Conservative: In a DOWN financial market, you could lose -3% to +1%. In a FLAT market, you could gain 2% to 5%. In an UP market, you could gain 6% to 8%.
Moderately Conservative: In a DOWN financial market, you could lose -5% to -1%. In a FLAT market, you could gain 0% to 6%. In an UP market, you could gain 7% to 10%.
Moderate: In a DOWN financial market, you could lose -10% to -8%. In a FLAT market, you could gain -3% to 5%. In an UP market, you could gain 6% to 12%.
Moderately Aggressive: In a DOWN financial market, you could lose -17% to -10%. In a FLAT market, you could gain -5% to 7%. In an UP market, you could gain 7% to 17%.
Aggressive: In a DOWN financial market, you could lose -25% to -17%. In a FLAT market, you could gain -9% to 9%. In an UP market, you could gain 10% to 25%.