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Showing posts with label Risk Tolerance. Show all posts
Showing posts with label Risk Tolerance. Show all posts

Thursday, May 7, 2020

Know Your Risk Tolerance Before Investing in Equities

Dear Reader,

Stock prices were on rise till Jan'18 with significant increase in retail investors participation during last couple of years. As many new investors get into stock market during such times, its always important for an individual investor to understand what is his/her investment profile and risk tolerance.

In 2018, with lot of pessimism building around equity market due to global factors, deteriorating of domestic macros with rise in crude oil prices, weakening rupee and liquidity crisis with IL&FS default, we have seen severe correction in broader market with Mid & Small Cap Index falling by more than 24% and 33% respectively from all times high made in January this year. Stock prices of many mid and small cap companies have seen a steep fall in the range of 30% to 60% or even more from highs made in beginning of this year. In such situation every investor looking to create wealth is confused whether to exit, hold or enter the stocks and at what levels to enter or exit.

We always suggest our members not to time the market and follow a disciplinary approach while investing in equities with medium to long term perspective. Its important to know, whether you would be able to hold on your positions in case stock market tanks? However, such severe corrections do not come very often and hence must be considered as buying opportunity to aggressively add on good quality stocks at discounted prices keeping a long term view. If you are a long term investor, its wise to be greedy when others are fearful.

Historical data indicates that most of the new investors get fascinated towards stock market to make quick bucks and finally end up loosing their capital as they cant hold on their stocks in case market corrects and sell out their stocks in a panic. Stock market is not a money making machine, you need not to be greedy on rising market or fearful when stock market falls, simply buy right and sit tight having sufficient patience with you to see your investment growing over a period of time.

We strongly recommend our members (who are new to stock market) to kindly go through our Asset Allocation Questionnaire to understand your investment profile and risk tolerance.

By answering 15 questions about your risk preferences, you can find out your investment profile and risk tolerance. This score will determine the asset allocation that best suits your risk preferences, you can use our simple excel workbook - Saral Gyan Asset Allocation Questionnaire which suggests the optimum split between cash, bonds and stocks.

The questions are simple to answer, with options provided to select answers using drop-down list, check boxes and radio buttons. They are designed to determine your tolerance to investment volatility, the size of your existing financial cushion, your time horizon, and what you want your investment to achieve.


Saral Gyan Investment Risk Profile & Asset Allocation workbook - Download

The questions asked in the excel workbook includes:

1.What is your total annual income before tax (including investment dividends but not including employment bonuses)?
2.How many sources of income do you have?
3.What is the value of your liquid (or investable assets)? This includes cash plus any easily sold investments like Gold, Bonds and Stocks.
4.What yearly income do you want from this investment portfolio?
5.How long do you intend to hold this investment portfolio?
6.What would you do if your investment portfolio fell in value by one-fifth (20%) over the course of 12 months?
7.What characteristics would you prefer your investments to have?
8.Do you prefer investments which have low volatility and low return, or investments which have high volatility and high returns?
9.What do you want this investment portfolio to do? Preserve capital, generate income, generate income with some capital appreciation etc.
10.What volatility (or risk) are you prepared to tolerate?
11.In the next five years, what percentage (if any) of the portfolio do you plant to sell to realize cash?
12.What kind of investments do you currently own, or would prefer to own? Domestic, international, aggressive, fixed income etc.
13.Assuming a time horizon of ten years, what annual return do you want?
14.Who do you normally get investment advice from?
15.How would you rate your current skill in managing investments?

Your answer to each question is rated with a score. The total score is used to suggest an asset allocation that is appropriate to your risk preferences; the workbook suggests a split between:

■ Cash
■ Bonds (high-yield, long-term, intermediate and international)
■ Stocks (large cap, mid cap, small cap and micro cap stocks)

You can also find out what kind of investor you’re considered; an income investor, a long term investor, an aggressive, moderate or conservative investor. Really helpful, do it yourself.


IMP Note: As our excel workbook is macro enabled file, do enable the macro's while using the file. If you do not understand macro's, do not worry. once you open the file, excel automatically ask you whether you want to enable or disable macro's, simply click on enable and proceed.

If you have patience and want to add extra power in your portfolio, start investing some portion of your savings in fundamentally strong small and mid cap companies - Hidden Gems & Value Picks.   

Time has shown that smart investors have made their fortune by investing in equities in long term. None other asset class can match giving you such extra ordinary returns. Yes, its important for you to invest in right set of companies at right price with medium to long term perspective. If you think to invest in stocks for period of 3 months or 6 months, we suggest you to stay out of stock market because you are not investing, you are betting on volatility of stock market which could be risky.Wish you happy & safe investing!

Regards,
Team - Saral Gyan. 

Thursday, December 5, 2013

Know Your Investment Profile & Risk Tolerance

By answering 15 questions about your risk preferences, you can find out your investment profile and risk tolerance. This score will determine the asset allocation that best suits your risk preferences, you can use our simple excel workbook - Saral Gyan Asset Allocation Questionnaire which suggests the optimum split between cash, bonds and stocks.

The questions are simple to answer, with options provided to select answers using drop-down list, check boxes and radio buttons. They are designed to determine your tolerance to investment volatility, the size of your existing financial cushion, your time horizon, and what you want your investment to achieve.


Saral Gyan Investment Risk Profile & Asset Allocation workbook - Download

The questions asked in the excel workbook includes:

1.What is your total annual income before tax (including investment dividends but not including employment bonuses)?
2.How many sources of income do you have?
3.What is the value of your liquid (or investable assets)? This includes cash plus any easily sold investments like Gold, Bonds and Stocks.
4.What yearly income do you want from this investment portfolio?
5.How long do you intend to hold this investment portfolio?
6.What would you do if your investment portfolio fell in value by one-fifth (20%) over the course of 12 months?
7.What characteristics would you prefer your investments to have?
8.Do you prefer investments which have low volatility and low return, or investments which have high volatility and high returns?
9.What do you want this investment portfolio to do? Preserve capital, generate income, generate income with some capital appreciation etc.
10.What volatility (or risk) are you prepared to tolerate?
11.In the next five years, what percentage (if any) of the portfolio do you plant to sell to realize cash?
12.What kind of investments do you currently own, or would prefer to own? Domestic, international, aggressive, fixed income etc.
13.Assuming a time horizon of ten years, what annual return do you want?
14.Who do you normally get investment advice from?
15.How would you rate your current skill in managing investments?

Your answer to each question is rated with a score. The total score is used to suggest an asset allocation that is appropriate to your risk preferences; the workbook suggests a split between:

■ Cash
■ Bonds (high-yield, long-term, intermediate and international)
■ Stocks (large cap, mid cap, small cap and micro cap stocks)

You can also find out what kind of investor you’re considered; an income investor, a long term investor, an aggressive, moderate or conservative investor. Really helpful, do it yourself. Click here to Download our Investment profile and Asset Allocation workbook. 

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.

Friday, November 30, 2012

Your Investment Profile & 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.

Tuesday, October 2, 2012

Managing Two Types of Risks in the Stock Market

One of the hardest challenges for investors in the stock market is managing risk.

There are at least two parts to managing risk.

1. The first part involves understanding what is a realistic potential reward for the amount of risk you are willing to take.

2. The second part is determining exactly how much risk you can tolerate and still be comfortable with investing.

Risk and reward go hand-in-hand, but they are not always balanced. For example, one stock may present a significant amount of risk, but given economic and market realities can only deliver a much smaller potential reward. In simple terms this means you will take way too much risk for far too little potential reward. Assessing potential reward involves understanding the company, its industry, the economy and market forces at play.

Even excellent companies face strong head winds when economic and market conditions are not in their favour. For example, a homebuilder, no matter how strong it might be in the market would've had a difficult time returning much of a reward to investors during the financial crisis that began in 2008.

It is not good enough to be a financially strong company if the economic and market cards are stacked against you. If you are a long-term investor and are very patient this kind of scenario may work to your benefit.

However, will only work if the price you pay for the stock is low enough so that any current reward is commensurate with the stock price and any future reward is predicated upon economic and market conditions changing to a more favourable position for the homebuilder.

Continuing our example, it would've been unrealistic to expect homebuilder to return 12 or 14% a year during the worst housing crisis in modern times.

If you are willing to wait for economic and market conditions to favor the real estate industry this company may have been made be a good long-term investment.

If the stock price was unrealistically high considering the conditions in the financial markets and the real estate industry, the stock may never achieve the kind of returns that most investors expect and need.

This is one of the prime reasons that when you evaluate a stock you examine not only the company but also its industry and how that industry fits into the economy and current business cycle.

One of the other ways long-term investors make money is by managing the level of risk so that they're comfortable with their investments.

Risk is a part of investing in stocks. You can't avoid the risk, but you can decide how much you are willing to take.

Not all stock investments are equal when it comes to risk. Smaller and newer companies are a greater risk than larger, more established companies are. Of course, in a severe down market, it may feel like every stock is in a free fall.

The question is how much risk are you willing to take?

In general, the higher the risk, the larger the potential reward should be. You should expect more conservative investments to produce lower returns.

The task for investors is to match their tolerance for risk with investments that will meet their financial goals.

But, how do you know how much risk you can tolerate?

A variety of "tests" on the Internet are available to measure risk tolerance.

We don't put much value in these tests. Here's why: When nothing is at stake, people tend to over-estimate their tolerance for risk.

A good analogy is playing poker for chips that you get for free contrasted with playing poker for real money. There is a significant difference in the way you play the game. When nothing is at risk, you may make wild bets and outrageous bluffs. However, when your actual money is on the table, most people will play much a much more conservative game.

Another way to think about risk is to consider this scenario:

If we offered you an investment and said, "there is an 80 percent chance this investment will be profitable," many people would say that's a reasonable expectation.

However, if we said, "there is a 20 percent chance this investment will lose money," many people would say that is too much risk.

Yet, it is exactly the same investment. The point is how you view your money and risk determines your risk tolerance. Most people know instinctively that some risks are too high, but not every investment presents an obvious risk you can gauge.

For most investors, finding their risk tolerance is a matter of experience. It is important that you avoid letting friends or your broker talk you into an investment that keeps you up at night.

You may need to adjust your financial goals to reflect a lower tolerance for risk, but keeping your risk at a comfortable will help keep you on track with an investment plan.

Saturday, August 25, 2012

Understand Your Investment Profile & Risk Tolerance

By answering 15 questions about your risk preferences, you can find out your investment profile and risk tolerance. This score will determine the asset allocation that best suits your risk preferences, you can use our simple excel workbook - Saral Gyan Asset Allocation Questionnaire which suggests the optimum split between cash, bonds and stocks.

The questions are simple to answer, with options provided to select answers using drop-down list, check boxes and radio buttons. They are designed to determine your tolerance to investment volatility, the size of your existing financial cushion, your time horizon, and what you want your investment to achieve.


Saral Gyan Investment Risk Profile & Asset Allocation workbook - Download

The questions asked in the excel workbook includes:

1.What is your total annual income before tax (including investment dividends but not including employment bonuses)?
2.How many sources of income do you have?
3.What is the value of your liquid (or investable assets)? This includes cash plus any easily sold investments like Gold, Bonds and Stocks.
4.What yearly income do you want from this investment portfolio?
5.How long do you intend to hold this investment portfolio?
6.What would you do if your investment portfolio fell in value by one-fifth (20%) over the course of 12 months?
7.What characteristics would you prefer your investments to have?
8.Do you prefer investments which have low volatility and low return, or investments which have high volatility and high returns?
9.What do you want this investment portfolio to do? Preserve capital, generate income, generate income with some capital appreciation etc.
10.What volatility (or risk) are you prepared to tolerate?
11.In the next five years, what percentage (if any) of the portfolio do you plant to sell to realize cash?
12.What kind of investments do you currently own, or would prefer to own? Domestic, international, aggressive, fixed income etc.
13.Assuming a time horizon of ten years, what annual return do you want?
14.Who do you normally get investment advice from?
15.How would you rate your current skill in managing investments?

Your answer to each question is rated with a score. The total score is used to suggest an asset allocation that is appropriate to your risk preferences; the workbook suggests a split between:

■ Cash
■ Bonds (high-yield, long-term, intermediate and international)
■ Stocks (large cap, mid cap, small cap and micro cap stocks)

You can also find out what kind of investor you’re considered; an income investor, a long term investor, an aggressive, moderate or conservative investor.

Monday, August 30, 2010

Your Investment Profile & 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.