Investor's first step is to establish goals

Getting Started

Your Money

March 14, 2004|By CAROLYN BIGDA

WHEN Eric Hines, 23, of Holliston, Mass., bought into the dot-com craze of the late 1990s, it was the biggest gamble of his young investing career.

"The stock market had a little more punch to it" then, says the research analyst for a commercial real estate company in Boston. "You could make more but lose more. It was exciting."

With a portfolio of mostly tech stocks, it was also sobering. Having lost about 25 percent of his initial investment by the end of 2001, Hines ended his aggressive stock binge and took a year-long hiatus from the market.

On reflection, he couldn't say why he had taken on so much risk. But defining your risk tolerance - the level of uncertainty and volatility an investor can handle - is a key element of meeting financial goals.

"If your risk attitude is not in line with your investments," says John Grable, an investment expert at Kansas State University, "you'll be influenced by the most recent news and end up buying and selling at the wrong time."

The theory goes that the more risk you assume, the greater your potential gain - or loss.

And all investments, no matter how stable, incur risks. For instance, the low returns of a certificate of deposit may not beat the rate of inflation. So even though your investment is almost guaranteed to grow, your money's buying power could erode.

Other risk factors include economic events such as a recession, foreign exchange rates, the loss of key players in a business and changes in government policy, such as tax rates.

Age, income and financial goals all influence how much risk you should be willing to tolerate. Advisers note that younger investors can be more aggressive since they have more time to overcome wild market swings.

But Grable says today's reality is that people in their 30s are more conservative than those in their 50s. One reason: a lack of investing experience and education to feel comfortable taking risks.

The wild and woolly market of the 1990s didn't encourage reflection, according to Grable. People were "throwing darts in 1998," he says, and the investing environment gave little incentive to learn about risk.

The first step in learning is to determine what you want to accomplish.

"Everything starts with your goals, not the product or opportunity," says Viktor Szucs, a certified financial planner at Quest Capital Management in Dallas.

To reach them, he recommends, create a mix of assets that will perform within your set timeline.

Eric Hines, for instance, would like to buy a condominium or other real estate within the next few years. With that objective in mind, he has changed his investment approach to one that includes a mix of stock and bond funds, each with different levels of expected growth.

If you're unclear about which securities you'll be comfortable with, take an online quiz, such as Grable's and a colleague's at (click on "Money and Investing") and others found on Web sites of financial institutions. The surveys will determine whether you're conservative, moderate or aggressive and list investments appropriate for each classification.

"Risk tolerance is not a personality trait," Grable says. "For one, the more you become knowledgeable, the more tolerant you will likely become."

Other factors that can increase your risk tolerance are a stable income, a well-financed emergency reserve and little or no debt.

Still, you shouldn't be losing sleep over where your money is stashed. Invest at your comfort level. The most important thing is to stay realistic about what returns you can expect with your choices.

Says Szucs, the financial planner: "The bear market taught very important lessons about things like diversification, staying the course and leaving emotional decisions out of investing."

E-mail Carolyn Bigda at

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