Hopeton Morrison, ContributorFINANCIAL ADVISERS live by the mantra of asset allocation which they argue allows you to spread your investments among different classes while minimising risk.
It is ill-advised at best to attempt to keep up with the day-to-day movements of the securities market and it is always more advisable to concentrate on simple investment strategies that work.
In a May 2003 article in Smart Money (the Wall Street Journal magazine of personal finance), Russell Pearlman addressed what he termed a Goldilocks Portfolio, which was one "not too hot when it comes to risk and not too cold on performance."
The implication, of course, was that a high-performing portfolio was invariably a high-risk one.
He proceeded to make mention of the legendary Harry Marko-witz who achieved great fame and the Nobel Prize in Economics in 1990 (shared with William Sharpe) for his revolutionary 'Modern Portfolio Theory'.
What type of investor are you?
To find out answer, the five simple questions in the smart money risk quiz below:
1. What is the most important goal of your investment portfolio?
a) To preserve principal.
b) To generate income I can spend now while it grows over time.
c) To grow substantially over time.
2. Investment X will grow, on average, at five per cent a year with no risk. Investment Y grows at 10 per cent a year, but could lose 20 per cent or more in a given year. Which is more attractive to you?
a) Investment X
b) A mix of X and Y
c) Investment Y
3. When do you think you will need to start using your investment money?
a) Within five years.
b) Between five and 10 years.
c)More than 10 years.
4. Which prospect is most appealing to you?
a) Investment X: average annual return of three per cent; best year, up eight per cent; worst year, down four per cent.
b) Investment Y: average annual return of 12 per cent; best year, up 40 per cent; worst
year, down 20 per cent.
c) Investment Z: average annual return of 17 per cent; best year, up 120 per cent; worst
year, down 55 per cent.
5. You just inherited a house in need of some repairs. The housing market is robust now, but there is no telling what it will be like a year from now. Do you:
a) Sell if for whatever you can get?
b) Rent it out?
c) Make repairs and sell it in a few years?
SCORING:
One point for each A answer, two points for B and three points for C.
Score 5-8: Conservative. Losing money really bothers you. You should have a fair amount in bonds and cash.
Score 9-12: Moderate. You are willing to take on some risk to make a decent return. At least half of your money should be in stocks.
Score 13-15: Aggressive. Big losses don't faze you if they lead to big returns. Tilt your portfolio predominantly toward stocks.
(Source: Smart Money
May 2003 issue)
