Beginner's Guide to Risk Tolerance

3. How Can I Reduce My Risk?

In real estate, it's location, location, location. In stock investing, it's diversify, diversify, diversify (see "Beginner's Guide to Diversification"). To reduce your risk, it's smart to invest in all the major asset categories (stocks , bonds and cash ), which are affected by different economic and market factors.

You can also spread your risk by diversifying further in each asset category. In the stock category, for example, you diversify by choosing stocks in several different industries (see "Industries vs. Sectors: What's the Difference?"). If you choose just one stock, you can wipe out your entire portfolio if that one stock decreases in value . Choose several in various industries, so that when one goes down, others will stay put, or go up, and balance out your total performance.

4. How Can Risk Reward Me?

With more money! Historically, the stock market has earned more returns for investors than bonds or cash. And over time, that difference adds up to a lot of money.

Now you're ready to take our Investor Profile Quiz, which will help you figure out the risk you want to take.

What's Your Investing Speed: Slow and Steady or Smokin'?

Each person approaches his or her investment decisions from a unique perspective: theirs! A stock investment that's perfect for someone else may be totally wrong for you, depending on several factors:

• How much risk you're comfortable taking.
• How much return you expect from your investment.
• How much you pay in taxes.
• How old you are.
• How many years you have to achieve your goal(s).

Investing is all about risk and return ; you can't get a handle on one (return) without knowing more about the other (risk).

How fast do you want to go as you head down the trail? Slow (conservative), steady (moderate), or fast (aggressive)? The following quiz can help you understand your investing speed. The number at the end of this quiz will tell you how much risk you're willing to take for the returns you need to earn to reach your goals.

The challenge is turning numbers into action, of course. Expectations, colored by our emotions, often get in the way.

As you read through each question, circle the one answer you feel most accurately describes your current point of view. There are no "correct" answers to this quiz, only answers that help you figure out the investment speed that fits your style. Don't worry about how others might view your answers -- this is for your eyes only! But it's important to be as honest and accurate as possible.

Ready to get a handle on the risk and return that's right for you? Let's go to the quiz.

Beginner Investor Quiz
1. I expect I will need to liquidate some or all of my investments in:			Points	Your Score
a. 2 years or less			0
b. 2 to 5 years			5
c. 5 to 10 years			8
d. 10 years or more			10
2. My age group is:
a. Under 30			10
b. 30 to 44			9
c. 45 to 60			7
d. 61 to 74			5
e. 75 and older			1
3. I have a cash reserve equal to three to six months of expenses.
a. Yes			10
b. No			1
4. My primary source of income is:
a. Salary/other earnings from my primary occupation.			7
b. Earnings from my investment portfolio.			5
c. Retirement pension and/or Social Security.			3
5. I will need regular income from this investment now or in the near future.
a. Yes			6
b. No			10
6. Over the long run, I expect this investment to average returns of:
a. 8% annually or less			0
b. 8% to 12% annually			6
c. 12% to 15% annually			8
d. 15% to 20% annually			10
e. Over 20% annually			18
7. The worst loss I would be comfortable accepting on my investment is:
a. Less than 5%. Stability of principal is very important to me.			1
b. 5% to 10%. Modest periodic declines are acceptable.			3
c. 10% to 15%. I understand that there may be losses in the short run, but over the long term, higher risk investments will offer highest returns.			8
d. Over 15%. You don't get high returns without taking risk. I'm looking for maximum capital gains and understand that my investment can substantially decline.			15
8. If the stock market were to suddenly decline by 15%, which of the following would most likely be your reaction?
a. I should have left the market long ago, at the first sign of trouble.			3
b. I should have substantially exited the stock market by now to limit my exposure. 5 pts			5
c. I'm still in the stock market, but I've got my finger on the trigger.			7
d. I'm staying fully invested so I'll be ready for the next bull market.			10
9. The best way to protect my investment when stock prices are falling is:
a. To time my purchases and sales of stocks to avoid large losses.			4
b. To invest in stocks now to take advantage when prices start to rise.			10
10. The best strategy to employ when stock prices are falling is:
a. Liquidate stocks and hold cash instead.			10
b. Use more sophisticated trading techniques to make a profit as prices decline.			7
c. Wait it out, because the market will eventually recover.			5
11. I would classify myself as:
a. A buy-and-hold investor who rides out all the peaks and valleys.			10
b. A market-timer who wants to capture the major bull markets.			7
c. A market-timer who wants to avoid the major bear markets.			5
12. My attitude regarding trading activity is:
a. Active trading is costly and unproductive.			0
b. I don't mind frequent trades as long as I'm making money.			2
c. Occasional trading is OK, but too much activity is not good.			1
13. If the S&P 500 advanced strongly over the last 12 months, my investment should have:
a. Grown even more than the market.			10
b. Approximated the performance of the broad market.			5
c. Focused on reducing the risk of loss in a bear market, even if it meant giving up some upside potential in the bull market.			2
14. I have experience with the following types of investments.	Extensive	Some	None
a. U.S. stocks or stock mutual funds	2	1	0
b. International stock funds	2	1	0
c. Bonds or bond funds	1	0	0
d. Futures and/or options	5	3	0
e. Managed futures or funds	3	1	0
f. Real estate	2	1	0
g. Private hedge funds	3	1	0
h. Privately managed accounts	2	1	0
15. Excluding my primary residence, this investment represents ___% of my investment holdings.
a. Less than 5%			10
b. 5% to 10%			7
c. 10% to 20%			5
d. 20% to 30%			3
e. 30% or more			1
			TOTAL

Add the points in the "Your Score" column to get your total. This score will tell you what risk category you currently fall into. Find the category below that matches your total score. Each category gives a description of the types of investments suitable for your risk tolerance.

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