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Overview: Investment Strategies Introduction to Investment Strategies Video Time-tested strategies for investing. LAUNCH VIDEO [1.2 MB] >> Determining an Investment Strategy Now, let’s take a look at different investment strategies. When it comes to choosing an appropriate strategy for your situation, keep the following important points in mind. GOALS. Clearly define what you are saving and investing for (home purchase, your children’s education, retirement, etc.). TIME HORIZON. Your time horizon refers to the length of time until you will access your assets (short term is usually less than five years and long term is usually 10 or more years). We will discuss appropriate investment options for both short- and long-term time horizons later in this section. RISK TOLERANCE. It is important to determine your risk tolerance before investing in the stock market. Taking advice from your next door neighbor may not be a good idea (he or she may have a much higher or much lower tolerance for risk than you). Use the risk tolerance worksheet below to determine your own tolerance for risk. Risk tolerance quiz The following questions are intended to help you measure your attitude toward investment risk as it applies to your financial goals. Fill out the form below: Strongly Agree Agree Disagree Strongly Disagree I am prepared to sacrifice some safety in exchange for higher returns. I am willing to accept some risk in effort to stay ahead of inflation. From time to time, I can tolerate negative returns. I am willing to take above average risks to achieve above average returns. Your Total Score is: Risk tolerance quiz results Score Investor Type Description 4-6 "A" Conservative Primary concern is preservation of capital 7-9 "B" Moderately Conservative Comfortable with a balanced portfolio weighted toward bonds and guaranteed instruments 10-13 "C" Moderately Aggressive Comfortable with a balanced portfolio weighted toward stocks 14-16 "D" Aggressive Can tolerate a high degree of volatility Explanation of scores: Total score between 4-6: You are a conservative investor with a very low tolerance to risk or market fluctuations. You feel comfortable with a portfolio weighted mostly in short-term bonds and fixed instruments, with only a small portion in stocks. Total score between 7-9: You are a moderately conservative investor. You feel comfortable with a portfolio still weighted towards bonds and fixed instruments, but with a moderate portion in conservatively diversified equities. Total score between 10-13: You are a moderately aggressive investor. Your assets may be weighted towards a diversified stock portfolio, but still with a good mix of bonds and fixed, guaranteed instruments. Total score between 14-16: You are an aggressive investor with a high tolerance to market volatility. You feel comfortable with most of your assets in stocks, but should still maintain a small portion in bonds and guaranteed accounts. During the asset allocation section of this course, you will learn more about the process of matching your risk tolerance with your investments. The three points listed above play an important role in choosing the appropriate investment options for your particular goals. In the Investment Types section, we defined the three main asset classes (cash, bonds and stocks). Now, let’s take a look at the role each asset class plays in your investment strategy. The first thing to remember about investing in the market is the less risk you take, generally, the lower return you will get. Conversely, the more risk you take, there is generally a greater potential for higher returns. There are no guarantees in the stock market and past performance is not a guarantee of future results. Below are some examples of how an investor might use the different asset classes. CASH: Because this is a conservative investment option, there is little risk involved in investing in cash. In turn, there is less potential for higher returns. An investor who has a short time horizon (less than five years) and whose main goal is to preserve capital, may choose to invest in cash equivalents. BONDS: One reason investors choose bonds would be to generate income from their portfolios. As we learned in the Investment Types section, bonds pay a fixed rate of interest. Keep in mind, though, that some bonds may carry more risk than others, so it is important to do your research before you invest. STOCKS: Stocks are referred to as growth assets, and they generally should not be considered short-term investments. An investor with a time horizon of less than seven years should not use stocks as their primary investment option. If an investor’s goal was to purchase a home in less than two years, that investor would not invest money in stocks. On the other hand, if an investor’s goal was saving for retirement and his or her time horizon was 30 years, that investor could invest more aggressively (if the investor was comfortable with a higher level of risk). This is because the investor would have time for the market to recover to offset any loss if the stock market experienced several down years. < BACK NEXT > #40131