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What's your risk tolerance?

Determining your individual risk tolerance is one of the main goals in choosing your retirement investment strategy. Basically, risk tolerance is the degree of ups and downs in the price of investments you can handle without withdrawing your funds. Most investors typically fall into one of three broad categories of risk tolerance: conservative, moderate or aggressive.

To figure out the level of risk you can tolerate before you start an investment program, you need to consider many factors: age, income, assets you own, liabilities you owe, goal deadlines, your investment attitude and education. The following risk quiz includes this information and will help you determine your overall risk tolerance.

Risk Quiz

Instructions: Circle the letter that best describes your personal situation. When finished, add up your point total and match it to the accompanying results.

1. Your age:

a. 20-45 years (3 points)
b. 46-62 years (2 points)
c. 63 years and older (1 point)

2. Your total household net income.

a. $50,000 or more (3 points)
b. $25,000-$49,000 (2 points)
c. $24,000 or less (1 point)

3. Total value of your assets-or what you own.

a. $50,000 or more (3 points)
b. $25,000-$49,000 (2 points)
c. $24,000 or less (1 point)

4. Percentage of monthly take-home pay going to debt after rent or mortgage.

a. 15% or less (3 points)
b. 16% to 20% (2 points)
c. 21% or more (1 point)

5. Do you read financial materials or watch financial programs regularly?

a. Yes (2 points)
b. No (1 point)

6. Do you have 3 to 6 months of living expenses saved for an emergency?

a. Yes (2 points)
b. No (1 point)

7. Will you be able to continue your investment for 10 or more years?

a. Yes (2 points)
b. No (1 point)

8. Are you comfortable investing even if you lose some of your money?

a. Yes (2 points)
b. No (1 point)

9. Do you save at least 10% of your net income?

a. Yes (2 points)
b. No (1 point)

10. If you received $50,000 from an inheritance or other source, would you risk it on stocks and bonds or put it in a bank or credit union savings account?

a. Risk on stocks and bonds (2 points)
b. Put in savings account (1 point)

Results

If your score is 19-24, you are considered an aggressive investor because you can tolerate high-risk investments. If you have no children or dependents, a stable income and little debt, this is the best time to invest in high-risk investments such as stock options, mutual funds and high-yield bonds. If you have dependents, only risk a percentage of your money that you can afford. Experts recommend saving 10% of your income to adequately prepare for your future.

If your score is 13-18, you are considered a moderate investor because you can tolerate moderate investment risks. If you have children, a steady job and little debt, you may want to consider a mixture of moderate and high-risk investments, such as blue chip growth stocks, small company stocks and common stock mutual funds. If you are in your 20s-40s, your family responsibilities probably require you to consider not only a retirement fund for yourself, but college education for your children. Be careful not to commit too much of your income during this time period because you still have a lot of time to invest. If you save 10% of your income, you should be on course for your retirement.

If your score is 12 or less, you are considered a conservative investor because your tolerance for risk is low. If you're under age 50 and your score is low because you have too much debt or too little income, consider ways to decrease your debt and increase your income, such as getting a part-time job. If you're nearing retirement age, you should consider purchasing corporate, municipal or government bonds and Treasury bills.

- Last Updated 9/28/03 -