What is your investment risk tolerance? Below are three categories of investors and characteristics and statements that describe them:
I want my money safe at all times, and I don't want to lose any of it.
Any decline in the value of an investment that I own concerns me.
I'm uncomfortable with price volatility (i.e., changes in investment share prices).
I want to minimize losses and fluctuation in the value of my investments.
I like to invest in something safe that offers a fixed rate of return.
I'm willing to give up higher rates of return in order to keep most of my principal intact.
I prefer investments that provide regular income without much exposure to principal loss.
I want my investment return to beat inflation by at least 2 percent.
I select investments that have a moderate amount of volatility, yet offer the opportunity for rates of return higher than certificates of deposit or government bonds.
Although a decline in the value of my investments concerns me, I can accept temporary market volatility in return for growth opportunities.
I would like to increase the value of my investments moderately, with limited exposure to risk, and I am willing to ride out market downturns.
I want a balanced investment mix and am willing to put up with some short-term fluctuation in value.
I like substantial appreciation opportunities, even though it puts my capital at high risk.
Temporary market fluctuations do not concern me because maximum appreciation is my primary long-term goal.
I expect a return greater than stock market indexes from my investments.
I am financially able to accept some limited liquidity in my investment portfolio.
I take calculated risks in order to ensure a potential for the highest return over time.
I have the conviction necessary to hold on to my investment during those years when it could drop in value by 25 percent or more.
It is important to remember that there is no such thing as a risk-free investment. All savings and investment products have some type of risk. An example is purchasing power risk for cash assets, such as CDs and Treasury bills. Because they earn a relatively low return, inflation can erode their value over time.
Another common type of investment risk, found in fixed income investments, is interest rate risk. This is the inverse relationship between bond prices and interest rates. When interest rates rise, bond prices usually fall, and vice versa.
Stock investors face market risk, which is the risk that the price of individual securities will be affected by the volatility of financial markets. All sorts of factors can cause market volatility including political events and the release of government economic data. Generally speaking, the greater the volatility of an investment, the greater its potential reward and the higher its risk.