As an investor, one of the most important things to understand before you begin to invest is your risk tolerance or willingness to lose money relative to your investments. This critical step should be done on an annual basis or when you have a major change in your life such as getting married, starting a family, losing a job, saving for children’s education, etc.
Today, there are many such questionnaires available on the internet (Google “Risk Tolerance Questionnaire”) and we feel it’s best for investors to complete a minimum of two questionnaires for comparison purposes. Below, you’ll find two such questionnaires we recommend to our clients. Answer the questions to the best of your ability. There are no ‘right’ or ‘wrong’ answers.
The first questionnaire is from Rutgers, The State University of New Jersey. There are 13 risk questions and 7 demographic questions. Allow 5-10 minutes and be sure to write down your numerical score and tolerance for risk when complete: http://njaes.rutgers.edu/money/riskquiz/
The second questionnaire is from The Vanguard Group. There are only 11 questions total but you might want to allow 10-15 minutes as this requires greater thought. (Question #10 refers to the annual amounts needed for retirement, a down-payment on house, children’s college education, etc.) Be sure to write down the suggested allocation when complete: https://personal.vanguard.com/us/FundsInvQuestionnaire
In next week’s tip, we’ll discuss what is meant by asset allocation and its importance to constructing a sound, prudent investment strategy within your risk tolerance.