SPECIAL REPORT: INVESTING IN THE ‘90s : Putting Money to Work: How Much, And Where?
The problem for many people isn’t deciding whether to invest; it’s deciding how to parcel their money among stocks, bonds and short-term money market or bank savings accounts.
What’s the right mix? To help answer that question, mutual fund giant Fidelity Investments devised this simple test, which the firm calls “FundMatch.”
The test is designed to help individuals who are considering investing a sum of money today for a specific use at least two years in the future. But Fidelity says many of its veteran investors have used the test as a financial checkup--to make sure their portfolios match their current financial needs, goals, and tolerance for risk.
So complete the test, tally your score and consult the key for your appropriate investment mix. One caveat: If investing for less than two years, Fidelity advises staying entirely in short-term accounts.
1. What portion of your total “investable assets”--the dollar amount of your current investments--will this new investment represent? That percentage can make a difference in whether you should be conservative or aggressive at this stage. (Don’t include your home in tallying your investable assets.)
Answer Points Less than 25% 8 25% to 50% 7 51% to 75% 3 More than 75% 2
2. Which one of the following describes your expected earnings over the next five years? Assume inflation will average 4% a year. If you expect your earnings to rise sharply, you may want to be more aggressive with your money now. Answer: I expect my earnings will far outpace inflation (due to promotions or new job) Points: 5
Answer: I expect my earnings to stay somewhat ahead of inflation Points: 3
Answer: I expect my earnings to keep pace with inflation Points: 2
Answer: I expect my earnings to decrease (because of retirement, part-time work, or other) Points: 1
3. Approximately what portion of your monthly take-home income goes toward paying off debt (auto loans, credit cards, etc.) OTHER THAN a home mortgage? If the percentage is high, you may need more cash available for emergencies.
Answer Points Less than 10% 8 10% to 25% 6 26% to 50% 3 More than 50% 1
4. How many dependents do you have (including children or parents)? The greater your family obligations, the more conservative you may need to be in investing.
Answer Points None 4 One 3 2 to 3 2 More than 3 1
5. Do you have an emergency fund--that is, savings equal to at least six months’ after-tax income? Without such a cushion, you risk being forced to tap long-term investments for unforeseen problems. Answer: I have no emergency funds Points: 2
Answer: I have less than six-months’ income set aside Points: 6
Answer: I have an adequate emergency fund Points: 8
6. Do you have a separate savings plan for other major, non-retirement expenses you expect to incur (college tuition, home down payment, home repairs, etc.)? Answer: Yes, I have a separate savings plan for these expenses Points: 8
Answer: I don’t expect to have such expenses Points: 6
Answer: I expect this new investment to help fund these expenses Points: 5
Answer: I have no separate savings plan for these expenses Points: 2
7. Have you ever invested in individual bonds or bond mutual funds? Your comfort level with the risk of these investments is important in deciding how aggressive or conservative you should be. Answer: No, and I’d be uncomfortable with the risk if I did Points: 1
Answer: No, but I’d be comfortable with the risk if I did Points: 9
Answer: Yes, but I was uncomfortable with the risk Points: 2
Answer: Yes, and I felt comfortable with the risk Points: 10
8. Have you ever invested in individual stocks or stock mutual funds? Again, your comfort level is key. Answer: No, and I’d be uncomfortable with the risk if I did Points: 1
Answer: No, but I’d be comfortable with the risk if I did Points: 15
Answer: Yes, but I was uncomfortable with the risk Points: 3
Answer: Yes, and I felt comfortable with the risk Points: 16
9. Investing is a matter of balancing comfort level with the desire to achieve specific goals. Which one of the following statements describes your feelings toward choosing an investment? Answer: I would only select investments that have a low degree of risk associated with them (i.e., it is unlikely I will lose money) Points: 2
Answer: I prefer a mix of investments with emphasis on those with a lower degree of risk, and a small portion in others that have a higher degree of risk but also higher return potential Points: 5
Answer: I prefer a balanced mix of investments--some that have a low degree of risk, others that have higher risk but also higher return potential Points: 9
Answer: I prefer an aggressive mix of investments--emphasizing those that have a higher degree of risk and thus higher return potential, along with some lower-risk investments Points: 12
Answer: I would only select investments that have a higher degree of risk and thus greater potential for high returns Points: 16
10. If you could increase your chances of improving your returns by taking more risk, would you: Answer: Be willing to take a lot more risk with all your money Points: 16
Answer: Be willing to take a lot more risk with some of your money Points: 12
Answer: Be willing to take a little more risk with all your money Points: 10
Answer: Be willing to take a little more risk with some of your money Points: 5
Answer: Be unlikely to take much more risk Points: 2
11. Your investment time frame is very important in determining your strategy. Stocks outperform bonds and short-term investments over very long periods, so people with long time horizons can afford to be more aggressive. In approximately how many years do you expect to need the money you’re investing?
Answer Points Within 2 to 3 years 5 4 to 6 years 25 7 to 10 years 40 10 to 15 years 45 More than 15 years 50
12. Do you expect to withdraw more than one-third of this money within 10 years? Note your answer to Question 6, regarding upcoming major expenses. Answer: No I don’t Points: 50
Answer: Yes, probably within 3 years Points: 5
Answer: Yes, probably in 4 to 6 years Points: 30
Answer: Yes, probably in 7 to 10 years Points: 50
YOUR SCORE: Add up total points for all 12 questions. . . . .
Scoring Key: What Type of Portfolio Should You Consider
Capital preservation Portfolio (Score of 0 to 75): Short-term: 50% Stocks: 20% Bonds: 30%
Moderate risk portfolio (Score of 75 to 132): Short-term: 20% Stocks: 40% Bonds: 40%
Wealth-building portfolio (Score of 133 to 179): Short-term: 5% Stocks: 65% Bonds: 30%
Maximum growth portfolio (Score 180 or more): Stocks: 100%
