Once you decide to start saving for your financial goals, you often have to define what kind of investment strategy to follow to reach your objective. That strategy will in part be determined by two important factors — your investment time horizon and your risk tolerance. Or, how long will the money need to grow (time horizon) and how much volatility in your investment returns (risk tolerance) are you willing to incur?
While most of us have a general idea of time frame we are investing for, we don’t necessarily think about our risk tolerance until something makes us realize it might be lower or more conservative than we actually thought; a fact which hit home in September 2008 when the market started a dramatic six-month drop.
So, how do you figure out where you fall on the risk tolerance scale? For a basic risk tolerance rating, there are a number of risk tolerance quizzes to be found on the internet. I happen to like this one. Although it is a bit longer than other similar quizzes, it provides not only a rating for risk tolerance, but it also provides a rating for your risk capacity. That way, you can see if your attitude towards risk aligns with your actual ability to take on the amount of risk you feel comfortable with assuming.
For a more detailed analysis, contact your financial advisor or investment representative. They should be able to provide you with a personal risk assessment, which may even include modeling or multiple market simulations to help make the concept of risk tolerance less abstract.
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Elizabeth,
Very nice job. Your blog is right on the money,so to speak.
Two elements of this blog entry may provide grist for future blogs.
1. How does one go about finding and choosing a financial advisor? How do you find out how “good” the advisor is? Is it better to go with an independent advisor or one who is associated with a nationwide company (i.e. A.G. Edwards)? Is there a way to determine an “average” fee before one begins looking? Is a flat fee for services better or worse than a percentage fee based on the amount invested?
2. I began investing with tax-deferred annuties (403b). I have since learned that, besides the obvious positive elements of this strategy, there are not-so-positive elements that I’m becoming aware of now that I’ve retired. Will you use some blog space to discuss the positives and negatives of tax-deferred investing, in a general sense?
Thanks,
Don
Comment by donmack — May 21, 2010 @ 9:35 pm
Thanks for the great input, Don.
I have added your requests to my upcoming topics list.
Elizabeth
Comment by NEAMB Elizabeth — May 24, 2010 @ 10:19 pm