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Tuesday, October 1, 2013

Your Investment Profile and Risk Tolerance


To get an idea of your investment profile, start by calculating your investment horizon.

Investment Horizon:

Investment horizon is the period of time, in years, that you wish to remain invested. Investment horizon may be measured as the point in time when you begin taking distributions, or it may be measured as the point in time when you expect to complete taking distributions.

This is the number of years that you can invest. Your investment horizon depends on your financial goal.

Financial Goal:

A financial goal is a goal that involves saving and investing to reach a specific amount by a specific date.

For example, a financial goal may be to save 2,00,000 for a college education fund for a child in 14 years, or it may be to save 30,00,000 for a retirement fund in 20 years.

You can achieve your financial goals through a combination of saving more, saving longer or earning a higher rate of return. Your goal may be to save for college, retirement, or a down payment on a home. Each goal has its own investment horizon.

For example, saving for retirement at age 65 when you're 20 gives you an investment horizon of 45 years. The longer the investment horizon, the longer you can save and benefit from compounding.

Next...

Estimate your Risk Tolerance:

Your risk tolerance is your willingness to accept some volatility in the rate of return of your investments in exchange for a chance to earn a higher return.

If you expect a higher rate of return, you should be willing to accept a higher degree of risk. This is called the risk-return trade-off.

Risk-Return Trade-off:

A basic investing principle that says the higher the potential rate of return, the higher the investment risk. Academic and industry studies support this relationship.

For example, stocks historically offer a higher rate of return than bonds. They also have a higher degree of investment risk. Investment risk is measured by the volatility of investment returns.

To get an idea of your risk tolerance, take a few minutes to complete the below risk tolerance quiz:


To get your own profile add the number of points for all seven questions

Add one point if you choose the first answer, two if you choose the second answer, three for the third and four points for the fourth question.

If you score between 25 and 28 points, consider yourself an aggressive investor.

Aggressive Investor:

An aggressive investor is an investor who is willing to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return.

Investment risk is the volatility of investment returns. A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return.

If you score between 20 and 24 points, your risk tolerance is above average.

If you score between 15 and 19 points, consider yourself a moderate investor.

Moderate Investor:

An investor who is willing to accept some investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns.

A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return. On the risk-tolerance scale, a moderate investor is in between an aggressive and conservative investor.

This means you are willing to accept some risk in exchange for a potential higher rate of return.

If you score fewer than 15 points, consider yourself a conservative investor.

Conservative Investor:

An investor who is unwilling to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns.

A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return.

If you have fewer than 10 points, you may consider yourself a very conservative investor.

This is only an example of a short quiz used by financial institutions to help you estimate your risk tolerance. For specific investment advice, you should always consult your financial adviser.