There is an old investing adage – Don’t invest in things that keep you awake at night. With the recent movements in financial markets I thought it a good time to bring up the topic of Risk Tolerance. This may also be useful to investment clubs. While thinking about this topic I remembered it was an issue when my club first formed. There was a founding member whose risk tolerance was out of line with the rest of the members. It caused some friction and this member eventually left much sooner than any other founding member. While I do not believe all club members must have the same risk tolerance, I think knowing the risk tolerance of members will help the club. The risk tolerance of members may also change over time. Learning about different investments and approaching retirement are events that may change risk tolerance profiles.
After performing an internet search on “financial risk tolerance” I found many brokerage firms offer questionnaires to gauge your risk tolerance. I particularly liked the one offered by Rutgers University. It is part of an academic research project and I had heard about it in my reading on Behavioral Economics. Both my wife and I took the test and had the exact same score though we answered questions differently. A list of possible investment types comes with your score when you complete the survey. This list matched our investment style quite well. There was only one investment listed I would be unlikely to consider.
I am considering asking all members of my club to complete the survey so we will have a better understanding of each others risk tolerance. I am not expecting any surprises as we have known each other over 20 years. Who knows, life sometimes sends surprises.
If you are interested the URL for the Rutgers survey is
http://njaes.rutgers.edu:8080/money/riskquiz/

Russell Malley
StockCentral Community Leader