Monday, September 12, 2011

Think You're a Risk Taker? Take a Test First

A longtime friend who admittedly knows very little about investing approached me the other day about the possibility of putting some money to work.
As we talked, it was becoming apparent that anything less safe than a guaranteed CD was going to be an unnerving proposition.
That can be a recipe for disaster if an investor is not careful.
One of the biggest mistakes investors make is miscalculating how much risk we're really willing to take on.
These are trying times in the market right now. The wild swings present great opportunities, but they are not for the faint of heart.
When people first ask me about dipping into stocks, especially those that carry higher risk-reward, I ask this question: "If you had an investment that dropped 20 percent in one day, or even one week, how badly would you freak out?"
If you envision a manic episode, you're probably not ready to wade too far out into the market, and certainly not on your own.
You can still make money in stocks, but you're probably best off sticking with mutual funds, exchange-traded funds and truly stalwart stocks like Proctor & Gamble and Altria. (So long as you're not averse to investing in cigarettes.)

But even if you think you're a risk-taker, you might not be. Imaginary losses are a whole lot easier to stomach than real ones. And most of us learn out risk tolerance the hard way.
But do we have to lose a good chunk of money to find out? Maybe so, at least definitively.
But fortunately, there are some resources out there to help us form a solid foundation for our decisions and avoiding pitfalls.

Here are three I found useful:

Try them out. See where you stand.
I scored a 34 on the Rutgers quiz. Kiplinger's says I should put every penny into stocks.
But Bankrate indicates I have only a "moderate" risk tolerance.
Go figure.

My portfolio down 7.3% on year. See it here.


  1. First question-

    How much of your long-term retirement money should you invest in stocks?

    Read more:
    Become a Fan of Kiplinger's on Facebook

    Ok that did'nt work but the quiz told me I should have %100 invested.

    Part two-

    to their money, it's a whole new ballgame.

    So let's play ball. Take this quiz, add up your totals and you should have a good idea of the type of investor you will be.

    1.You just won $10,000 in the lottery. Congratulations! What do you do?

    You answered: You speak to your father's stock broker and decide to invest it in the stock market.
    (2 pts.)
    2.You are sitting at the blackjack table at Trump's Taj Mahal casino. You have been gambling. You started with $10,000, but you have lost $4,000 so far. How much more are your prepared to lose to win the $4,000 back?

    You answered: Nothing. You quit now and go home with $6,000 in your pocket.
    (1 pt.)
    3.You decide that gambling is not the way to go. You want to get some advice on what to do with your money, so you ...

    You answered: Read as much as you can, watch the news, and invest based on your research.
    (2 pts.)
    4.You have finally decided to invest the money. You invest in ...

    You answered: Blue chip stocks.
    (2 pts.)
    5.You are now a stock market junkie, and you are watching your new investment. You believe ...

    You answered: Equally that the value of your investment will increase or decrease.
    (2 pts.)
    6.You wake up this morning and hear the market went down 2,000 points (Arrgh!!!). What do you do?

    You answered: Invest more because prices are lower -- if it was a good buy at the original price it is even better now.
    (3 pts.)
    7.Well, with all of this excitement, you realize you're enjoying this stock market ''thing,'' so you decide to ride out the storm. How long do you expect it will take for your investment to double?

    You answered: Three years
    (2 pts.)
    8.Believe it or not, your stock is not affected by the decline in the market, and one month later, the value of your stock is up 50 percent. You have no information on why this is happening, but you decide to...

    You answered: Sit tight and hold on to your original position.
    (2 pts.)
    16 pts.
    Moderate –- You don't want your porridge too hot, but on the other hand you don't want it too cool either. That lukewarm stuff from Baby Bear is just about right as far as you're concerned. And you approach your investments the same way: A little risk is OK to beef up your returns, as long as it's a little risk with not much chance of losing your money.

    You probably ought to seek the same temperature for your investments. Hybrid funds that contain both stocks and bonds would work. You want some stocks to keep you from falling behind in your returns, but you'll probably be comfortable only with the bluest of blue chips. And while you might not need all Treasury Bonds, you don't want to be buying any junk either.

    Part three-

    Your Score: 30
    You have an above-average tolerance for risk.

  2. It tells me I should have 100% invested, too. I'm thinking that's due to a combination of a long horizon, a few different sources of income, and a higher tolerance for risk. But that's just a guess.