The following
investment questionnaire determines your model portfolio. It could be applied to your 401k, IRA, and
other investments as well.
Investment objectives
and goals: choices could be growth, conservative growth, income and growth,
capital preservation, etc.
Time horizon (your age)
is the most crucial factor in your risk tolerance model. When do you expect to
start withdrawing from your portfolio? How soon do you need to access the
liquidity? These are the two most important questions you need to answer
regarding risk tolerance.
Risk tolerance: this
means what degree of investment loss you can tolerate. Is it very high, high,
moderate, low, or very low? Do not count your chickens before they hatch. When
you plan to trade on ETFs, ask yourself how much you can afford to lose if
things go wrong, instead of how much you are going to make. Be aware of
risk. Also, be mindful of “event risk.”
This is the risk of an unforeseen occurrence, from a political assassination to
a tsunami, playing havoc with the markets.
Liz Weston said, “Risk
is part of life. While you can’t avoid
it, you can make sure the risks you’re taking are appropriate for your goals.”
This is from her book, The 10 Commandments of Money (page 86).
Ali Velshi has
formulated very detailed descriptive model portfolios. He accomplishes this
with investment questionnaires and choosing the right types of funds with
appropriate risk level. His book is Gimme
My Money Back (page 125-134).
As investors, when we
buy ETFs we pay the asking price, when we sell we pay the bidding price. If an ETF has a small trading volume, we
might pay a high bid-ask spread, and then add the trading cost. To avoid this
scenario, we suggest investors choose ETFs with higher liquid and larger asset
values.
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