What's Your Investment Risk Tolerance?

I had a goal of writing an entry every day… but life is getting in the way. Now my modified goal is to write a minimum of once a week, and try for every other day.

But I have not been idle. I did stop by my local used book store www.recyclebookstore.com and looked through their selection of investment books. I picked up 2 books that looked interesting, and still relevant. Remember, my goal this year is to learn charting methods and using option spreads better. One book was an “Idiots guide to Options and Futures”. I have not started it, but it looked like a standard guide of the language, definitions, and strategies for options and futures trading. I’ll report on it another time.

The book I did start reading is called “Riding the Bull, Beating the Bear” by Edward M.Yanis. I have not got to far in, and it looks like it’s really a presentation of the Y-Process strategy (I have not got to that chapter yet, nor have I looked it up on the web, so no spoiler comments please)

What I have got to is a chapter review of Risk Tolerance. It had a short quiz to score my risk tolerance. I also got on line for see if there were any better ones. They all seem a bit contrived, and the questions are a bit goofy, but it was an interesting exercise. I recommend it to every one. I’ll post some links at the end of the blog today.

I took the quiz twice… because I think I have a split personality when it comes to financial issues and decisions. Both Cindy and I are financially conservative. We put savings away every paycheck, I have been boosting my 401K contributions 1% each year. I think it’s at about 11% now… At some point Cindy will say it’s too much, but that is the strategy for now. We tend to save and pay cash for big purchases, and typically will try to even not have a car payment… as a consequence; I do drive a beater 1999 Dodge Caravan. But, Hey, a car just gets you from point A to point B, right?

Right… Back to the subject of Risk Tolerance. I first took the quiz excluding the crazy trading I’m doing in my Schwab account, and reverted to my conservative nature… As expected I go a score on one test of 25 and a statement that “You have an average/moderate tolerance for risk”. I don’t just stick my money in CDs, but I also don’t take risks with money that I need to pay the mortgage or have for the kids collage funds either.

I then took the quiz again, based on how I think with my “chunk” of money that I play with in the Schwab account, and I got a score: 37, and a statement that “You have a high tolerance for risk.” I would agree with that. I tend to take more risk with this money… but only this money. I remember when I got started a few years ago, with less value in the account; I clicked all the “I Agree” buttons to turn on margining. Suddenly I had about twice as much money to play with, albeit at a cost of between 6.5% and 8%. Well it did not take long for me to feel the pain of a margin call. After getting a voice mail from Schwab, and having to put extra cash in the account… and then having a few more close calls (pun intended) I think I have learned my lesson. I still use my margin privileges, but keep it much lower. More on that in a later post. Anyway… The point I was I’m making is that I’m much more risk tolerant with this account.

Here are the 2 Quizzes I took. Like I said, I like the first one better… the second one is a bit lame, but the exercise is still valuable.

http://njaes.rutgers.edu/money/riskquiz/

http://moneycentral.msn.com/investor/calcs/n_riskq/main.asp