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The Savvy Financial Planner

How Does the Savvy Financial Planner Ann Arbor Assess Risk?

Investing and poker have been compared on manylevels. For starters, poker is a zero-sum game—what the winner wins has to be equal to what thelosers lose. But investing is not a zero-sum gamebecause over time stocks tend to have positivereturns, making it possible for investors to beoverall winners.
Both, however, are games of incompleteinformation with unknown variables andconditions that cannot be controlled. To offsetthese uncertainties, it is important for players ofboth groups to assess and understand theirappetite for risk. Doing so develops discipline, astrategy, and may help reduce unexpectedsetbacks.

Investment Consultant Ann Arbor

The questions below are designed to help shedlight on your risk tolerance. The questions arehypothetical in nature and are not meant torepresent investment advice. Answers aresymbolic of different risk levels: “a” conservative,“b” moderate, and “c” aggressive.

1.    I am comfortable with investments that mayoften experience large declines in value if there isa potential for higher return.

a.    Disagree b. Uncertain c. Agree

2.    Suppose you owned a well-diversified portfoliothat fell by 20% over a short period of time.Assuming you have 10 years until you beginwithdrawals from your account, how would youreact?

a.    I would immediately change to a moreconservative portfolio. b. I would wait at least 6months to one year before changing to moreconservative options. c. I would not change myportfolio.

3.    Which statement best describes yourinvestment goals?

a.    Protect the value of my account by minimizingloss and accepting lower long-term returns. b.Balance moderate levels of risk with moderatelevels of returns. c. Maximize long term returns and accept large or dramatic swings in the valueof my investments.

4.    Portfolios with the highest average returns alsotend to have the highest chance of short-termlosses. The data below represents fivehypothetical investments of $100,000 over a oneyeartime frame. Which range would you feel mostcomfortable with?

a.    Portfolio A: $139,000 – $88,800 b. PortfolioB: $179,000 – $75,700 c. Portfolio C:$215,000 – $59,500

Now, keep in mind that these are only guidelinesmeant to give you insight into how you think andbehave as an investor. Once you have discoveredthat you are, let’s say, aggressive, this certainly doesn’t mean that you now have to invest in high risk stocks and emerging markets for the rest of your life. On the contrary, your risk tolerance maychange over time, and revisiting these questions periodically may let you know if it’s time tochange your investment strategy.

And as we’re sure you’ve heard your financial advisor say many times, diversification does not eliminate the risk ofexperiencing investment losses. Past performanceis no guarantee of future results! Be sure to consult with your investment manager to discuss this topic in detail.

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