Tuesday, February 21, 2012

Risk Tolerance

Dear income investors,

The subject today is Risk Tolerance.

Risk Tolerance has become more real to every investor in view of the many potential problems that exist in this country and the world.

 Income investors have already narrowed their investing focus on instruments that generate income and that alone defines you as less risk tolerant than day traders or momentum investors.  However, you should revisit this concept of risk tolerance periodically.

Probably the best measure of your own risk tolerance is to look back to March 3, 2009 when the Dow closed at 6626.94, how did you feel that day?  How will you feel if it happens again?  For me, I was very nervous.   I was still managing other people’s money and had moved all cash out of money markets and into insured certificates of deposit.

One is pretty nervous when you do not trust money market funds.  Nowhere to hide was the mantra of my colleagues.  Yet my clients and I survived on the dividends companies paid and by companies and municipalities that continued to pay interest on their debt.   Actually, just after the “crash” with the market very volatile, we also made quite a bit of money on covered calls. 

You should revisit your own personal risk tolerance and Rutgers University has a questionnaire that I do like.  I have tried many that just are not appropriate for income investors.  So many questionnaires ask theoretical questions for which we do not have answer options that describe our situation.  For instance, how will I change my investments if I lose my job?  If you are retired and do not have a job how do you answer that question.

I would like you to take this quiz and let me know if you think the results reflect your risk tolerance.   Click here to go to the Rutgers' site.

I do not particularly care for their investment recommendations, but I am interested in your opinion of the risk tolerance quiz.

The relevance of knowing your own risk tolerance is paramount.  It will help you determine if being an income investor is truly for you.  It will help you determine if you should use the income strategies that I recommend; interest, dividends and covered calls,

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