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Thursday, April 22, 2010

DIY Investor Newbie - Step 2 Risk Tolerance (Cont.)

Questions 6 - 10 of the questionairre:

6. How do you feel after making an investment? This is pretty important because it indicates experience. The first time many people make an investment they feel a bit queasy. But with experience they learn that, to paraphrase Annie, "The sun comes up tomorrow." It happens again when the market takes a dive.

7. Job...Do you have a personality that prefers stability (bonds/lower risk) or are you willing to take a chance to achieve a higher reward? Good personality indicator, but a bit hypothetical. Would really be useful if we could observe people confronted with the actual choices. A difficult question, I think, for people to actually answer.

8. Save or not ...Pretty straightforward and useful. Indicator of capacity to take risk.

9. React when experience a loss? Very useful if it can be answered truthfully. In fact, for those involved in the market in 2008, this can be directly answered. Did you sell near the bottom, around March 2009? If so, it is worth analyzing. Maybe you procrastinated. Maybe you have a tolerance for pain. Maybe you have a financial plan, understand that markets rebound and that you had reached a point where it paid to stay the course. Again...worth thinking about.

10. Are you knowledgeable about investments? A key question. If you don't know how markets work, then you are likely to pull out at the wrong time in a declining market. Many did this in 2009. To counter this, you need a very conservative asset allocation.

1 comment:

  1. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.


    Attempt to be fearful when others are greedy and to be greedy only when others are fearful.

    ~ Warren Buffett

    I kept those two quotes in mind every day during the financial crisis as I continued to buy.