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RISK ASSESSMENT

Risk Tolerance Questions:

1. Age:  What is your age?
    1. 65 and over
    2. 45 to 64
    3. 35 to 44
    4. 25 to 34
    5. 24 and under

The younger you are generally, the more willing you should be to tolerate risk.  If you are younger, you have a longer time horizon in which to grow assets.  Generally, over the longer term, assets invested in the stock market have outperformed other asset classes.  So if you are younger, should think about taking a little more risk.  A general rule of thumb is that you should include bonds in your portfolio equal to your age.


2. Time Horizon:  What is your investment time horizon for this money?
1. 1 year
2. 2-5 years
3. 5-10 years
4. 10-20 years
5. 20 years or longer

While you will have different time horizons for different “buckets” of money, you should remember that money in the stock market is subject to more risks.  Generally, if your time horizon is less than 3-5 years, it may not be a good idea to invest a sizeable amount in the stock market.  You time horizon will have an impact on how much risk you are willing to take.

3.  Investment Goals:  What is your primary objective for this money?
 1. Preservation of Principal
 2. Current Income
 3. Growth and Income
 4. Conservative Growth
 5. Aggressive Growth

Your goals and budget seem to drive most areas of personal finance.  Depending on your goals, it will make a big difference on where you invest your assets.  If your goal is safety of principle, you should be willing to take on very little risk.  Therefore, you should invest accordingly.  If your goal is aggressive growth, you should be willing to take on much more risk.  Your goals will, to a degree, drive your willingness to take on risk.


4.  Personal Earnings:  Regarding your current income, do you expect it to:
 1. Decrease dramatically in the future
 2. Decrease a slight amount in the future
 3. Stay about the same
 4. Increase with the pace of inflation
 5. Increase dramatically

Your income is an important driver of your investment program.  If you feel your income will decline in the future, you will likely be much less willing to tolerate risk than if you think your income will increase dramatically.  So your expectations of your earning ability will have an impact on your portfolio and risk.


5.  Emergency Fund:  What amount of money do you have set aside for emergencies?  This does not include borrowings or credit lines, but does include money in checking and savings accounts, CDs, money market funds, and assets in no-load open-end mutual funds that you can access quickly in case of an emergency.

  1. None
  2. Enough to cover three months of expenses
  3. Enough to cover six months of expenses
  4. Enough to cover nine months of expenses
  5. Over twelve months of expenses

The more money you have that can be used as an emergency fund, the more you are able to take on additional risk.  Generally, with your first investments, you should take on very little risk.  As your asset size increases, so should your willingness to increase your level of risk.

6.  Investment Experience:  Which statement best describes your personal investment experience?
 1. I have never invested any money in any financial market or instrument.
 2. I am relatively new investor, having invested for only a few years.
 3. I have invested some of my money through IRAs and through employer sponsored retirement plans (401 (k)) for quite some time, but now I am ready to develop additional investment strategies outside of that plan.
 4. I have invested for quite some time and am fairly confident in my ability to make prudent investment decisions.
 5. I have invested money for years and have a definite knowledge of how the stock and bond financial markets work.


Generally, the more experience investors have with the financial markets, the more risk they are able and willing to bear.  However, this should be tempered by your willingness to accept risk.

7.  Investment Risk:  Regarding your view of risk, which investment would you be more comfortable making?
 1. I am comfortable investing in savings accounts, CDs, and other short-term financial instruments that are FDIC Insured.
 2. I invest in savings accounts and CDs, but I also own various income-producing bonds and/or bond mutual funds.
 3. I have invested in a broad array of stock and bond mutual funds, but only the highest quality.
4. I have invested primarily in growth stocks and growth stock mutual funds.
5. I like to pick out new and emerging growth companies and aggressive growth stock mutual funds.

For most investors, a look at what they are invested in now may be a good indication of their willingness to take on risk.  If they are invested only in CDs and other “safe” instruments, they are likely not willing to take on much risk.  If they are investing in aggressive stocks and mutual funds, that indicates they are willing to take on much more risk.

8.  Investment Preferences:  Which investment would you be more likely to invest in?
1. This investment has a 20-year average annual return of 4%. It has achieved those returns with infrequent and very slight downturns. This investment has never experienced a negative return.
2.  This investment has a 20-year average annual return of 6%.  It has achieved those returns with mostly positive returns, although there have been periods of less than a year of negative returns.
3.  This investment has a 20-year average annual return of 8%. It has achieved those returns with a few moderate downturns where the decline lasted less than six months and then began to recover. It has experienced more than one-year of negative returns.
4.  This investment has a 20-year average annual return of 10%. It has achieved those returns with several periods of above average returns and several periods of negative returns
5.  This investment has a 20-year average annual return of 12%. It has achieved those returns while cycling through several periods of substantially above average returns and several periods of substantially negative returns.

Generally, higher returns require higher risk, which in this case is the possibility of having several years of negative returns.  If you are comfortable with lower returns and lower chances for negative returns, you should position your portfolio accordingly.  If you want the higher returns and are willing to take on the higher risk, likewise invest according to your willingness to accept risk.

Your Risk Score

The initial asset allocation determination is the easiest, your age in bonds.  If you are 25 years old, your beginning point would be your age in bonds or 25% in bonds.  The remainder of your portfolio would be in equities.

The second step is to adjust your initial allocation based on the results of this risk tolerance test.  To calculate your score, simply add up the points from each of the questions. You will receive one point for each number that you circled. For example, if you circled a 1 as an answer to question 1, you receive one point. If you circled a 4, you receive four points.  Add all the points together from all the questions, and it will put you into a specific category, i.e. very conservative, conservative, moderate, aggressive, and very aggressive. 

As you see which category you are in, you will notice that below each category is an adjustment to that initial asset allocation.  If your risk category is “Very Conservative”, you would notice that your adjustments to your initial allocation would to be increase bonds and cash by roughly 20%, and reduce your equities by 20%.  At age 25 with this risk level, the results suggest an allocation of 45% bonds and 55% equities.  At age 50, with this risk level, it suggests and allocation of 70% bonds and 30% equities.

The final step is to review your “Risk Tolerance Category”, and with that knowledge, allocate between the various asset classes within stocks and within bonds.  If you are “very conservative,” you would invest the majority of your allocations in the least risky asset classes within stocks, mainly large capitalization stocks.  For purposes of diversification, you might have a small allocation, say 5 to 10% of your stock allocation to be invested each in small capitalization or international stocks.  Likewise you would invest the majority of bond assets in the least risky categories of bonds, i.e. money market mutual funds, treasury securities, and corporate bonds.

These questions and this scoring scale is not meant to be used for anything other than as a general guide to how much risk you are willing to take and to help you in your stocks versus bonds and cash allocation.  Your actual investment plan may and should be based on additional information that was not asked in this questionnaire, as well as weighting information on which of the above questions are more important to you.  While it is not exact, it may be helpful as you create a portfolio of investments that matches your asset allocation to your risk tolerance level. 

Risk Tolerance Results

Risk Tolerance Category                              Points


Asset Classes:                  Adjustment to the initial asset class weights

1.  Very Conservative                                (8 to 12 points)
Cash                                                +5%
Bonds                                           +15%
Stocks                                            -20%

2.  Conservative                                        (13 to 20 points)
Cash:                                               +0%
Bonds:                                          +10%
Stocks:                                           -10%

3.  Moderate                                             (21 to 28 points)
Cash                                                  0%
Bonds                                                0%
Stocks                                               0%

4.  Aggressive                                            (29 to 36 points)
Cash                                                 -5%
Bonds                                              -5%
Stocks                                           +10%

5.  Very Aggressive                                  (37 to 40 points)
Cash                                                 -5%
Bonds                                            -15%
Stocks                                           +20%


 

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