Money Talks: Risk Tolerance

Reprinted from PN October 2001
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Recent market volatility has made it more important than ever to consider the relationship between risk and return. Investors want high returns, yet they also want to know their money will be available to meet their needs.

When you invest, the weight you give each of these desires is commonly known as your risk tolerance. Knowing your risk tolerance will help you identify your investment profile and decide how to allocate your assets.

Your risk tolerance depends on many things, including your goals and time frames and your income and asset base. Merrill Lynch has identified five investor profiles that describe the ways in which investors generally characterize their objectives and their feelings about risk:

Capital Preservation. The investor's main objective is to maintain capital. Investment returns may be relatively low, or in some years negative, in exchange for high liquidity and reduced risk of principal loss.

Income. The main objective is to obtain a continuing income stream from dependable debt and equity sources. This type of investor should be willing to absorb some risk of principal loss in order to satisfy current yield requirements.

Income/Growth. This investor's objective is to strike a balance between current income and growth. Despite the relatively balanced nature of the portfolio, an investor should be willing to assume risk of principal loss.

Growth. This investor's objective is to accumulate wealth over time, rather than obtain current income. To seek growth, he or she will accept the risk of price volatility.

Aggressive Growth. The objective is to achieve above-average growth over time; income is of little, if any, concern. This investor is willing to take substantial risk to seek above-average returns.

Once you determine your investor profile, the investment strategy known as asset allocation seeks to reduce the effects of market fluctuations by balancing the characteristics of stocks, bonds, cash and, in appropriate cases, alternative investments such as hedge funds and private equity investments.

Because asset categories do not usually gain or lose value concurrently, including more than one of them in a portfolio can reduce volatility over time by offsetting setbacks in one category through gains in another.

Over time, you may need to change your portfolio's investment mix, depending on your life circumstances, your investing time frames, and market performance. Your financial advisor can help you evaluate your portfolio periodically in light of your goals and tolerance for risk and can help determine if you are on track to achieving your objectives.

Rosemary Berkery is senior vice president of the Merrill Lynch U.S. Private Client Marketing and Investments Division. Visit the company's Families of Children With Disabilities Program Web site, . Contact: David Cleary, financial consultant, Merrill Lynch Private Client Group, (800) 937-0405 / (949) 859-2932 /


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Money Talks: Risk Tolerance


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