Risk vs Reward. We have all heard of the concept. Do you like to take on risks or are you afraid of losing money? When you first start investing, it is important to understand what your risk tolerance is. I created a very short questionnaire which will help you determine what your risk tolerance is.
How do you view investments?
(1) They should be completely safe. I don’t want to lose my hard earned money
(2) I’ll take a chance, but I don’t want to lose too much money
(3) It takes money to make money. I’m all in!
Do you want your investments to:
(1) Provide you stable income over time starting today
(2) Provide some income but also a little growth
(3) Provide no income, I want to see my money grow!
How much value would you be willing to lose on your investments in a year?
(1) Less than 5%
(2) 5% to 15%
(3) 15% and above
What kind of returns do you want on your investments?
(1) Less than 5%
(3) 7% and above
When do you plan on accessing your investments?
(1) Within the next 5 years
(2) Between 5 and 20 years
(3) 20 years and above
If you scored 8 and below you have a low risk profile. As a result, you will be better off investing heavily in bonds, money market funds, and keeping a small portion in stocks. If you scored between an 8 and 11 you have a moderate risk profile. You’re best option is to split your portfolio evenly between stocks and bonds. If you scored 12 or more you have a high risk tolerance. You can invest more heavily in stocks and keep a small portion of your portfolio in bonds.
Most people will probably fall in the moderate risk profile. With a moderate risk profile, you would invest 40-60% in stocks and 40-60% in bonds, with a small portion in a money market account.
If you are interested in learning more about your risk tolerance, Wells Fargo has a great tool that will help you get started.
What is your risk tolerance? Did you get what you expected? Please leave a comment below. I’m eager to hear your response!