What kind of investor are you?

The decision to save for retirement is an easy one when you consider the potential future benefits, but how to invest is often the source of uncertainty and frustration for new investors.

Before investing, it’s important to know what kind of investor you are so you can select a mix of investments consistent with your financial situation and your risk tolerance. Assessing your risk tolerance is a key factor in determining what kind of investor you are.

What is risk?

Risk can be defined as the possibility of losing all or part of your investment. The potential for higher returns goes hand-in-hand with higher risk. Conversely, low-risk investments are associated with lower returns. Before you consider any investment, it is important to understand risk and to determine your risk tolerance. This tool will help you to determine your risk tolerance.

Select the response to each statement that most closely matches your own investment philosophy. After completing this exercise, you'll have a chance to craft the appropriate mix of investments to fit your risk profile.

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1. Previous Investing Experience

I've been investing in stocks or bonds, either as mutual funds or as individual securities, for:

    

2. Investment Preferences

Overall, I prefer the following investment types:

                              

3. Risk Aversion

If a stock or bond investment of mine dropped significantly in value, I would move my money out of it.

                              

4. Risk Tolerance

Assume you're investing $5,000 of your own money and have the following four investments from which to choose. Based on the range of possible ending values for these investments, which one would you pick?

                              

5. Growth or Income

Of the following statements, select the one that most closely reflects your risk tolerance and approach to reaching your retirement goals:

    

6. Time Horizon

The number of years that you invest is one of the most important factors in picking an asset allocation. The more time that you have to invest, the more you can afford to have higher-return, higher-risk investments like stocks and bonds in your portfolio.

How many years until you plan to begin drawing funds from your portfolio?

                              

7. Dependents

A more conservative investment strategy may be appropriate when many people are dependent on your future income.

How many dependents, including children and elderly parents, will you be supporting during your retirement years?

       

8. Current Net Worth

Your asset allocation also depends upon the total value of your assets, your "net worth." Be sure to include your primary residence and all savings investments.   

What is the total of your assets?

       

9. Retirement Savings

The size of your retirement nest egg is another factor that affects your allocation. In general, the more savings you have, the more you can afford to diversify among different asset types. Select the current value of all savings and investments that you have set aside specifically for retirement. Include retirement accounts and exclude your primary residence.

What is the total of these savings?

       

10. Unexpected Expenses

With an ample emergency fund (three to six months of expenses), you're much less likely to need your retirement savings for unexpected expenses. Without such a fund, you're putting your retirement savings at risk, which may decrease your investing time horizon. For quick, easy access to this emergency money, keep it in very short-term investments, such as cash equivalents.

Do you have a separate emergency fund?

       

11. Expected Expenses

You might be planning to withdraw some of your retirement savings for nonretirement expenses. The sooner you need this money, the more your savings should be in readily accessible investments, such as cash equivalents. (Remember that taxes are due and IRS penalties apply to many early withdrawals of retirement savings.)

In the next ten years, do you expect to withdraw from your retirement savings for nonretirement expenses?

    

12. Future Financial Situation

Your future financial situation (the ability to meet your expenses, job stability, and future earnings) is another indicator of how likely it is that you will need to withdraw your savings for unexpected expenses. In general, the more stable your situation, the less likely this is to occur, which suggests a more aggressive investment approach.

In the future, I expect my financial situation to be:

    

Your Investment Style:

Higher-risk investor - Most aggressive

Won't lose sleep at high levels of risk.

Choose Your Investments >>

Higher-risk investor - Moderately aggressive

High levels of risk are acceptable in seeking out potentially higher returns.

Choose Your Investments >>

Moderate-risk investor - Moderate

Some safety is good, but will accept moderate levels of risk.

Choose Your Investments>>

Moderate-risk investor - Moderately conservative

Willing to take some risk, but still need a sizeable anchor of safety.

Choose Your Investments >>

Low-risk investor - Conservative

Low risk tolerance. Safety is important, but willing to invest in riskier areas on a limited basis.

Choose Your Investments >>

 

 

Higher-risk investor

Most aggressive

Won't lose sleep at high levels of risk.

Higher-risk investor

Moderately aggressive

High levels of risk are acceptable in seeking out potentially higher returns.

Moderate-risk investor

Moderate

Some safety is good, but will accept moderate levels of risk.

Moderate-risk investor

Moderately conservative

Willing to take some risk, but still need a sizeable anchor of safety.

Low-risk investor

Conservative

Low risk tolerance. Safety is important, but willing to invest in riskier areas on a limited basis.

 

Fixed Income

10%

 

Large-cap stock funds

40%

 

Mid-cap stock funds

15%

 

Small-cap stock funds

15%

 

International equity funds

20%

 

Fixed Income

25%

 

Large-cap stock funds

30%

 

Mid-cap stock funds

14%

 

Small-cap stock funds

14%

 

International equity funds

17%

 

Fixed Income

40%

 

Large-cap stock funds

25%

 

Mid-cap stock funds

10%

 

Small-cap stock funds

10%

 

International equity funds

15%

 

Fixed Income

50%

 

Large-cap stock funds

20%

 

Mid-cap stock funds

9%

 

Small-cap stock funds

9%

 

International equity funds

12%

 

Fixed Income

60%

 

Large-cap stock funds

15%

 

Mid-cap stock funds

8%

 

Small-cap stock funds

7%

 

International equity funds

10%