Test Your Risk Tolerance

"If you're the kind of person who says about the stock market, 'But it could go down,' you'll probably want to take the more conservative road."

- Ilyce R. Glink, author of
100 Questions You Should Ask About Your Personal Finances

With which types of investments are you most comfortable?
1. Money market accounts
2. Government savings bonds
3. Corporate bonds or bond funds
4. Stocks or stock funds
After you make an investment, you feel:
1. Nauseous
2. Satisfied
3. Hopeful
4. Invigorated
Say you invest $20,000. Each of the following answers shows the range of returns that your investment may experience after just one year, based on the underlying holdings. Which investment would you be most comfortable holding?
1. $21,000-$19,000
2. $23,000-$18,000
3. $27,000-$16,000
4. $30,000-$14,000
For the last 5 years, your investment has returned an average 10% per year--in line with other similar investments. However, it loses 20% over the next year. What do you do?
1. Sell all of the investment
2. Sell a portion of the investment
3. Nothing
4. Buy more of the same investment
Which phrase best describes your take on life?
1. Proceed with caution--take no unnecessary risks
2. Take small, measurable risks and patiently pursue your dreams
3. Prepare well but follow your goals without fear
4. No-holds barred--go for it!

If you selected mostly (a)'s:

You are a highly risk-averse investor. You're also the strongest candidate to get out there and learn as much as you can about investing, because the more you know about risk and reward potential, the better you can manage your portfolio to take advantage of growth opportunities. But don't let this slow you down--start out with a diversified portfolio of bonds, treasury bills, CDs, money market funds, and cash, and gradually upgrade to more growth-oriented securities as you learn more and become more comfortable with investing.

If you selected mostly (b)'s:

You are a somewhat risk-averse investor, but you understand the importance of investing and do so with a measure of caution and calculated risk. You would benefit from a diversified portfolio that includes stocks, bonds, and cash--a trusted financial advisor can help you determine your personal allocation strategy. It is important to remember that everyone needs some component of growth in his or her portfolio in order to mitigate the impact of taxes and inflation.

If you selected mostly (c)'s:

You understand the concept of risk but are prepared to deal with the consequences in an effort to attain greater growth opportunities. You seem comfortable with your investment selections, which generally are the product of sound research and a balanced strategy that combines conservative, medium, and high-growth oriented investments.

If you selected mostly (d)'s:

You like taking risks and have an aggressive growth-oriented portfolio--perhaps with only a small or no safety net in terms of principal preservation. This approach is generally considered too freewheeling, and you might be better served with a more balanced portfolio. If you are quite young (20s and 30s) and have sufficient income so that you're not reliant upon your investments, taking the precarious high-risk road may reward you way down the road. However, make sure that your equity holdings are diversified and always maintain a long-term perspective.