A Quiz to Help Investors Set Risk Parameters
Investing well is an art and a science. It takes more than knowledge of the markets; it requires soul-searching and knowledge about yourself too.
If you are uncomfortable with a specific investment, chances are you’ll buy or sell at the wrong times, turning what could have been a profitable venture into a losing proposition. Yet, if you invest too conservatively, you probably will miss lucrative opportunities.
How do you balance the two? A first step is to determine how much risk you can tolerate.
Fidelity Investments, a national mutual fund and brokerage company, compiled a quiz designed to help determine an investor’s risk profile. Your answers to these 12 questions should give you a general idea of where you fall in the investment spectrum.
Even if you have not experienced a specific situation in the quiz, try to answer based on what you think you’d do if you faced the issue today. The quiz should be used as a tool for self-evaluation, not as a basis for making specific investment decisions.
1. My salary and overall earnings will probably grow significantly in coming years.
a) disagree strongly b) disagree c) neither agree nor disagree d) agree e) agree strongly
2. If I were deciding how to invest contributions in my retirement plan, I would choose investments that offered fixed yields and stability.
a) agree strongly b) agree c) neither agree nor disagree d) disagree e) disagree strongly
3. I believe that investing in today’s volatile stock market is like spinning a roulette wheel in Las Vegas--the odds are against you.
a) agree strongly b) agree c) neither agree nor disagree d) disagree e) disagree strongly
4. If I were picking a stock to invest in, I would look for companies that are involved in developing the hot products of the future, such as the next penicillin.
a) disagree strongly b) disagree c) neither agree nor disagree d) agree e) agree strongly
5. If I were selecting an investment for my child’s college education fund, I would chose:
a) certificate of deposit b) government-backed mortgage securities or municipal bonds c) corporate bonds d) stocks or equity mutual funds e) commodities futures contracts
6. The following number of dependents rely on me for their financial welfare.
a) four or more b) three c) two d) one e) only myself
7. The number of years remaining until I expect to retire is approximately:
a) currently retired b) less than five years c) five to 14 years d) 15 to 24 years e) 25 or more
8. My net worth (the value of my assets less my debts) is:
a) under $15,000 b) 15,001-$50,000 c) $50,001-$150,000 d) $150,001-350,000 e) over $350,000
9. The amount I have saved to handle emergencies, such as a job loss or unexpected medical expenses, equates to:
a) one month’s salary or less b) two to six months’ salary c) seven months’ to one year’s salary d) one to two years’ salary e) more than two years’ salary
10. I would rather invest in a stock mutual fund than buy individual stocks because a mutual fund provides professional management and diversification.
a) agree strongly b) agree c) neither agree nor disagree d) disagree e) disagree strongly
11. I want and need to reduce the overall level of debt in my personal finances.
a) agree strongly b) agree c) neither agree nor disagree d) disagree e) disagree strongly
12. When making investments, I am willing to settle for a lower yield if it is guaranteed, as opposed to higher yields that are less certain.
a) strongly agree b) agree c) neither agree nor disagree d) disagree e) strongly disagree
Scoring: Give yourself one point for every “a” answer, two points for every “b,” three for every “c,” four for “d” and five for “e.”
46 and higher: You probably have the money and the inclination to take risks. High-risk investments include aggressive growth stocks, start-up companies, commodities, junk bonds and limited partnerships, as well as stock options and investment real estate. But be sure to diversify at least some of your portfolio into safer investments. Even you could lose everything and regret your high-risk tolerance.
41-45: You have an above-average tolerance for risk and probably enough time and income to cover your losses. Investors in this category are wise to mix high-risk and low-risk options.
36-40: You have an average tolerance for risk but don’t like to gamble. Consider a mix of long-term investments that have a history of strong and steady performance. Blue chip stocks, high-grade corporate bonds, mutual funds and real estate are all possible options.
31-35: You have below-average tolerance for risk, either because of your age or your income and family circumstances. Comfortable investments for you would probably include your home, high-quality bonds, government-backed securities and federally insured savings accounts.
30 and below: You have virtually no tolerance for risk. Look for investments that have government backing, such as bank and thrift certificates of deposit, Treasury bills, bonds and notes.
