Paul Ferraresi

How much risk should you take with your investment portfolio? When I sit with a new client and I ask them how much risk they want to take they tell me… Paul, I am a “REAL” conservative investor. Then, I find that they have placed all their monies in Pork Belly Futures… Whew!

So, what is conservative for one person is aggressive for another. In the professional world of investment management, advisors do not use words to describe risk; rather, they use detailed analytical systems. We use an educational program for all clients that entail the development of an Investment Policy (20-25 pages in length). From there we can create a customized Asset Allocation Plan. Then, there are NEVER any shocks, surprises or disappointments for the client. They know exactly what to expect in good and bad markets.

Here is a non-scientific question to risk tolerance that I use on clients to add some levity to our meetings (and it does give me a general look at their risk level). Mr. & Mrs. Jones if you were to come in to me with $100,000 to help you invest, and, one month after you made the investment it dropped in value to $78,000. Tell me… how would you feel? (What is your answer?).

None the less everyone wants a quick fix or answer, so, here is a short quiz for you. Be honest with yourself. DO NOT look at the answer guide ahead of time.

Enjoy…

The following questions can help you gauge your risk tolerance. Add up the points from your answers to the questions below: There is no right or wrong answer, just what’s right for you.

1. Protecting my original investment (the principal) is more important than achieving significant growth. Do you:
   1. Strongly agree? 0
   2. Agree? 4
   3. Disagree? 11
   4. Strongly disagree? 16

Points_____

2. Which of the following investment strategies best suits you?
   A. One that seeks to avoid loss 0

   B. One that has potential for both moderate gain and moderate loss 9

   C. One that maximizes potential gain regardless of the potential for loss 18

   Points_____

   3. You own a stock fund that has lost 15% of its value over the past year, despiteprevious years of solid performance. This loss is consistent with those of similar funds during the past year. At this time would you:
      A. Sell all of your fund shares? 0

      B. Sell some-but not all-of your fund shares? 4

      C. Continue to hold all your shares? 9

      D. Buy more shares to increase your investment in the fund? 12

      Points_____

      4. Inflation can greatly reduce the real rate of return on investments over time. Which of the following best describes how you feel about investment risk with respect to inflation? I am willing to accept:

      A. Significant potential for loss and high volatility

      in trying to greatly exceed the rate of inflation 18

      B. Moderate potential for loss and lower volatility in trying to exceed the rate of inflation 9

      C. Minimal potential for loss, although my investment may only keep pace with inflation 0

      Points_____

      5. Which of the following three hypothetical investment portfolio returns over a one-year period are you comfortable with?

      A. A potential return of 6% a year with a slight chance 0

      of losing value

      B. A potential return of 10% a year with a moderate chance

      of losing value 9

      C. A potential return of 14% a year with a significant chance

      of losing value 18

      Points______

      6. Which of the following hypothetical portfolio average annual returns over a three-year period are you

      most comfortable with?

      A. Between 0% and 10% 0

      B. Between -5% and 18% 9

      C. Between -10% and 26% 18

      Points______