When preparing for your retirement, your investment strategy will be determined by your risk tolerance for investing, time horizon, and investment goals. Determining these factors in advance makes it easier to stick to a disciplined investment process and see the gains in wealth over time.
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Balancing Your Risk Tolerance for Investing with Diversification
Investment diversification is an asset allocation strategy for balancing out the level of risk so that you can enjoy long-term gains while cushioning your portfolio against short-term dips in any particular market. This can help you to feel more comfortable about your investment strategy and the level of return you would like to receive. However, a diversified portfolio does not guarantee protection from loss and there is no guarantee that it will outperform a non-diversified portfolio.
Investment Risk Tolerance Quiz
We have prepared a quick investment risk tolerance quiz to help you determine your risk tolerance for investing and the most appropriate approach to investment for you. There are no wrong answers in this quiz and every score leads to a tried-and-tested investment strategy. Circle the score from each category that best applies to you and find your ideal investment model below!
1. Time Horizon for Investing
What is your investment timeline? When do you expect to begin making withdrawals?
| ANSWER | SCORE |
|---|---|
| Less than 1 year | 0 |
| 1 to 2 years | 1 |
| 3 to 4 years | 3 |
| 5 to 7 years | 7 |
| 8 to 10 years | 9 |
| 11 years or more | 11 |
2. Time Horizon for Withdrawing
Over what time span do you expect to withdraw your invested funds?
| ANSWER | SCORE |
|---|---|
| I plan to take a lump-sum distribution | 0 |
| 1 to 4 years | 2 |
| 5 to 7 years | 4 |
| 8 to 10 years | 5 |
| 11 years or more | 6 |
3. Tolerance for Fluctuations
Your risk tolerance for investing largely depends on your ability to sit out the ups and downs of fluctuating accounts, which can seem problematic in the short term but historically lead to larger long-term average returns than the more conservative investments. Keeping this in mind, what is your primary investment objective?
| ANSWER | SCORE |
|---|---|
| Protect the value of my account | 0 |
| Keep risk to a minimum | 5 |
| Balance risk and return | 10 |
| Maximize long‐term investment returns | 15 |
4. Response to Dips in the Market
Imagine that you own a well-diversified portfolio and still have 10 years until you expect to make a withdrawal. Due to unforeseen events, a volatile market environment results in a 20% decline in the immediate value of your portfolio. What do you do?
| ANSWER | SCORE |
|---|---|
| I would not change my portfolio | 15 |
| I would wait at least a year | 10 |
| I would wait at least three months | 5 |
| I would make a change immediately | 0 |
5. Comfort Level with Volatile Investments
How comfortable are you with investments that experience frequent large declines but may potentially result in higher returns?
| ANSWER | SCORE |
|---|---|
| Agree | 15 |
| Disagree | 8 |
| Strongly Disagree | 0 |
Investment Strategies Based on Your Risk Tolerance for Investing
These investment strategies range from the highest risk tolerance option at the top to the lowest risk tolerance option at the bottom:
| MODELS AVAILABLE: | SCORE RANGE: |
|---|---|
| 100% Stock Allocation | 55 – 62 |
| 80% Stock/20% Fixed Income Allocation | 43 – 54 |
| 60% Stock/40% Fixed Income Allocation | 29 – 42 |
| 40% Stock/60% Fixed Income Allocation | 7 – 28 |
| 20% Stock/80% Fixed Income Allocation | 0 – 6 |
Consult the Advisors at ML&R Wealth Management LLC
At ML&R Wealth Management, we are here to help you maximize your investments for a financially-healthy retirement. Whether you have a high or low risk tolerance for investing, our team can help you find investment strategies to suit your needs.
Please reach out to our financial advisors in Austin if you have any questions about our investment risk tolerance quiz and start growing your wealth today!