Thursday, December 28, 2006

Game Plan: Step 2 - Know your risk tolerance

Know your risk tolerance. There are two kinds of risks in investing: the risk of losing money and the risk of losing an oppurtunity to make money. Both are in conflict. Take for the case, if you invest in some instruments, it may lose some or all of your money. But due to the fear of losing your money you are missing out on making some good returns through investing. We should always have a good defence in the form of risk tolerance/protection built into our investment game plan.

Without having a risk protection built into your investment game plan, you are driving a F1 racing car without any brakes. You will experience high speeds and the thrill of that, but without brakes you will end up in a crash. There are few questions which when answered will help you in gauging your risk tolreance. See yourself in the situation explained and answer honestly to the questions, this would be a revelation to you.

Risk Quiz:

1. Your portfolio of investments is invested 40% in Debt funds and 60% in Equity funds, according to a long term goal plan. After 6 months you find that your equity funds are down 10 percent, even sensex is down 8%. Market analysts are not sure which way the market will slide to, You..

  1. Sell all of your equity funds and invest those in Debt funds
  2. Stick with your investment game plan
  3. You will sell your Debt funds and invest in equity funds

2. Your equity fund gave a return of 25% in 1995, 20% in 1996. It looked good to you, so you invested in that fund. Now the returns from that fund are as follows:

  • 1997 : 18%
  • 1998 : 15%
  • 1999 : 12%
  • 2000 : -8%
  • 2001 : -20%

During this period, you...

  1. Can't take the pain of 2000 into 2001 and sell
  2. Decide to hold through all the five years
  3. Move to a IT fund in 1999.

3. Your core fund has given you an year on year return rate of 10 %. You hear about an infrastructure fund which is posting nearly triple digit returns, and you heard good about the fund manager, You...

  1. Do nothing
  2. Sell 5% of your core fund and invest those in the infrastructure fund
  3. Sell 35% or more of your core fund and invest those in the infrastructure fund

4. Following question 3, say you invested 5% of your portfolio in the hot infrastructure fund and after 2 years, this fund represets 12% of your portfolio, You...

  1. Were the one who selected option 1 in question 3 and still wont do anything
  2. Sell half of the units in the infrastructure fund. You still have confidence but still you want to take some money back
  3. Thrilled by this infra fund, you invest more 10% of your portfolio in this

5. In early 2000, you learn that an IT fund gave a 120% return in 1998 and 170% return in 1999. You invest in this fund. By the end of 2000, the fund crashes and loses 90% and you dont expect the market to rebound soon. You..

  1. Would have never touched this fund ever
  2. Sell and take almost 10% of your investment which is left
  3. Stay the course while you watch another 70% of what was left disappear in 2001

Give 1 point where you have chosen 1st option, 2 points where you have chosen 2nd option and 3 points where you have chosen 3rd option. Not calculate your score.

  • 5 - 7 points - Conservative (Risk averse)
  • 8 - 12 points - Moderate (Risk steady)
  • 13 - 15 points - Aggressive (Risk seeker)

There are various other surveys which can give more better and accurate results. Some of them are

1 comment:

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