To get an idea of your investment profile, start by calculating
your investment horizon.
Investment Horizon:
Investment horizon is the period of time, in years, that you
wish to remain invested. Investment horizon may be measured as the point in
time when you begin taking distributions, or it may be measured as the point in
time when you expect to complete taking distributions.
This is the number of years that you can invest. Your investment
horizon depends on your financial goal.
Financial Goal:
A financial goal is a goal that involves saving and
investing to reach a specific amount by a specific date.
For example, a financial goal may be to save 2,00,000
for a college education fund for a child in 14 years, or it may be to
save 30,00,000 for a retirement fund in 20 years.
You can achieve your financial goals through a
combination of saving more, saving longer or earning a higher rate of return.
Your goal may be to save for college, retirement, or a down
payment on a home. Each goal has its own investment horizon.
For example, saving for retirement at age 65 when you're 20
gives you an investment horizon of 45 years. The longer the investment horizon,
the longer you can save and benefit from compounding.
Next, estimate your risk tolerance.
Your risk tolerance is your willingness to accept some
volatility in the rate of return of your investments in exchange for a chance
to earn a higher return.
If you expect a higher rate of return, you should be willing to
accept a higher degree of risk. This is called the risk-return trade-off.
Risk-Return Trade-off:
A basic investing principle that says the higher the potential
rate of return, the higher the investment risk. Academic and industry studies support
this relationship.
For example, stocks historically offer a higher rate of return
than bonds. They also have a higher degree of investment risk. Investment risk
is measured by the volatility ofinvestment returns.
To get an idea of your risk tolerance, take a few minutes to
complete the below risk tolerance quiz:
To get your own profile
add the number of points for all seven questions
Add one point if you choose the first answer, two if you choose
the second answer, three for the third and four points for the fourth
question.
If you score between 25
and 28 points, consider yourself an aggressive investor.
Aggressive Investor:
An aggressive investor is an investor who is willing to accept a
higher degree of investment risk in exchange for a chance to earn a higher rate
of return.
Investment risk is the volatility of investment returns. A
basic investing principle states that a higher degree of investment risk is
required to earn a potential higher rate of return.
If you score between 20
and 24 points, your risk tolerance is above average.
If you score between 15
and 19 points, consider yourself a moderate investor.
Moderate Investor:
An investor who is willing to accept some investment risk in
exchange for a chance to earn a higher rate of return. Investment risk is the
volatility of investment returns.
A basic investing principle states that a higher degree of
investment risk is required to earn a potential higher rate of return. On the
risk-tolerance scale, a moderate investor is in between an aggressive and
conservative investor.
This means you are willing to accept some risk in exchange for a
potential higher rate of return.
If you score fewer than 15
points, consider yourself a conservative investor.
Conservative Investor:
An investor who is unwilling to accept a higher degree of
investment risk in exchange for a chance to earn a higher rate of return.
Investment risk is the volatility of investment returns.
A basic investing principle states that a higher degree of
investment risk is required to earn a potential higher rate of return.
If you have fewer than 10 points, you may consider yourself a
very conservative investor.
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