How to Match Your Risk Tolerance to Your Investment Strategy

How to Match Your Risk Tolerance to Your Investment Strategy

One study has shown that 94% of an investor s return is driven by their asset allocation. 1 segmented among investment strategies. To determine an appropriate asset allocation for your portfolio consider the following three questions: 1. How long until you retire? 2. How much do you need to retire? 3. What is your risk tolerance? Deciding how far you are from retirement is fairly straightforward. In our last guide we covered how to calculate the amount of money you will need to retire. In this guide we are focusing on the third part of the equation, determining your risk tolerance. tolerance is a measure of your willingness to accept higher risk or volatility in exchange for higher potential returns. Investors with high tolerance are willing to accept losing capital in search for higher returns. Investors with low tolerance are more conservative and want to preserve capital. investment products developed by institutions fail to address the human complexity of your willingness to take risk is one of the many differentiating Your personality type, behavior and decision making tendencies should all factor into determining your risk tolerance. When you meet with a member of inherited behavioral traits, career path, and your current investment portfolio to learn more about your willingness to take risk. We also take into account that your preferences will change over time due to changes in circumstances. We work with our clients to re-evaluate their risk tolerance at least once a year in our annual review. risk assessment questionnaire, which was designed to help us identify

your investment philosophy and attitude towards risk. The results of this questionnaire along with our initial conversation help us narrow down the investment portfolios and allocations that may be appropriate for meeting your click here or call 888.600.2783. QUESTIONNAIRE identifying your investment philosophy and attitude towards risk. The results investment portfolios and allocations that may be appropriate for meeting your 1. TIME FRAME How many years can you let your money grow before you ll need to tap into your nest egg? (This is important because a fully-invested investor must be able to withstand down cycles). If the working time frame for your investment portfolio is: 1-2 years 3-5 years 6-10 years more than 10 years 2. YEARS UNTIL RETIREMENT Where are you in relation to retirement? The farther you are from retirement, the more risk you may take. If the number of years between now and retirement is: 0-2 years 3-5 years 6-10 years more than 10 years

3. FINANCIAL CUSHION emergencies. This will help us determine how much risk you may prudently take in your investing. If you have: Little outside savings set aside, hence preservation of principal is very important Reasonable savings set aside and are willing to take moderate risk for moderate returns Ample savings set aside (house paid off, CDs, insurance, etc.) hence you feel comfortable taking larger risks for maximum return potential 4. NEED FOR INCOME How important is current income to you in the near term? Will you depend on income from your investment account for living expenses? If current income is: Critical Needed to a large degree Needed to a minor degree Not important 5. INVESTING ATTITUDE Your current attitude toward investing over the next decade will help dictate what type of strategy you could adopt and how much risk your investments could entail. If your current attitude is: I cannot afford any significant loss of capital regardless of potential return If I can get ample income from bonds, it is not worth suffering through the ups and downs of the stock market If I can get a moderate return on my money, I am willing to Higher risk investments tend to earn higher returns than lower risk investments, and I want higher returns so I am willing to take higher risks

6. SPECIAL CIRCUMSTANCES Are there any circumstances you can envision (college tuition, home purchase, retirement, etc.), outside the usual contributions and withdrawals, that might If you can envision: Full portfolio could be liquidated Major liquidations Some small liquidations No liquidations planned 7. PRIMARY OBJECTIVE Think about your personal investment goals. If you would generally categorize your primary objective as: Capital Preservation - emphasis on maximizing principal stability; future growth of income and principal are of minor importance; short investment time horizon and low tolerance for big fluctuations in current income Current Income - emphasis on providing a high level of current income; future growth of income and principal are secondary objectives. Moderate Growth - approximately equal emphasis on current income and potential for future appreciation and income growth. Aggressive Growth - emphasis on future appreciation, not current income; year-to-year principal stability is not important. 8. OVER THE PAST 70+ YEARS, THE INVESTMENT VEHICLES BELOW RETURNED APPROXIMATELY THE FOLLOWING AVERAGE YEARLY GAINS: Stocks 11.0% Cash (T-bills) 3.7% Bonds 5.2% Inflation 3.7% Knowing this, what would you consider to be a reasonable average annual return for your portfolio? Less than 4% 4%-8% 9%-12% 13% or more Note: We can make no assurances that this result will be achieved.

8. THE TABLE BELOW INDICATES HOW MUCH THE STOCK MARKET HAS FALLEN IN ANY GIVEN YEAR OVER THE LAST SEVERAL DECADES: Routine Decline (5% or more) Moderate Correction (10% or more) Severe Correction (15% or more) Bear Market (20% or more) Past performance does not guarantee future results. How Often to Expect This: About 3 times a year About once a year About once every 2 years About every 3 years Assume you have $1,000,000 invested and that sum represents your entire savings. Given the information in the table above, at what level would you become uncomfortable given your $1,000,000 investment? $950,000 $900,000 $850,000 $800,000 Add up the total points for each question on pages 2 and 3 to arrive at a total score. Based on your total score, see the chart on the following page to determine the investment risk classification that best meets your objectives. SCORECARD Points: 1. Time Frame 2. Years to Retirement 3. Financial Cushion 4. Need for Income 5. Investing Attitude 6. Special Circumstances 7. Primary Objective 8. Return on your Investment 9. Risk Tolerance Your Total Score

WHAT YOUR SCORE MEANS Total: Risk Level: Type of investment plan you could follow: 9-13 Low Risk This objective is most suitable for the needs of more conservative investors who place a greater emphasis on current income with growth of principal as a secondary objective. 14-22 Moderate Risk This objective is most suitable for the needs of clients desiring moderate growth of capital. 23-31 Moderate-to- This objective is most suitable for the needs of assertive growth High Risk investors who are willing to accept greater risk in search of bigger returns. 32-35 High Risk This objective is for aggressive growth investors with a 3-5 year time horizon and little sensitivity to tax considerations. Aggressive growth accepts larger interim loses in the pursuit of growth returns. Still have questions? Need help getting started? We ve helped thousands of people each with unique goals and objectives plan for retirement. Call Zacks Investment Management at 800.245.2934 or click here to set up a time for us to call you to find out how we can help you reach your retirement goals. Financial Analysts Journal, July-August 1986, pp. 39-44. constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or as a whole.