Assessing your investment risk tolerance is vital to developing a fully personalized plan for long-term financial success

Our free financial freedom plan web site provides essays about how to generate a personally customized financial planning strategy. These articles can help you in developing a lifetime financial plan for your family. To generate a comprehensive long-term investment management strategy also depends upon using a high quality financial software with the best investment planning software and the best personal financial planning software combined. The home page of this website helps you to find the best do-it-yourself financial planning tools, including the top financial retirement planning program, the top home budget calculator, and a very high quality lifetime investment calculator for your self-directed life long personal financial planning.

Investors with different appetites for investment risk tolerance are more satisfied with investment portfolio risk exposures that are more in line with their ability to cope with investment financial risk and rewards.

Investors who are more risk-averse are more satisfied with a less risky investment asset allocation – regardless of lower expected investment returns or the related need to save more to achieve their lifetime financial plans. The reverse is true for investors with a greater tolerance for investment risk, since they can stomach greater market price swings without panicking. Historically, investment results for more risk tolerance investors have allowed them to achieve higher returns and to save at lower rates in pursuit of the same financial goals as more risk averse investors.

Nevertheless, all sane investors are risk averse to some degree, and that is what normally keeps current securities market prices down relative to expectations about future securities values. The key question is what kind of investor are you from an investment risk tolerance standpoint? This important answer is a direct driver of the asset allocation percentages of your personal portfolio. Your asset allocation percentages determine the greater or lesser degree of exposure that your personal investment portfolio has to investment risk and the opportunity for higher investment returns.

Trivial financial industry investment risk tolerance questionnaires often use just a couple of leading questions that quickly categorize you along some part of the range from “conservative investor” to “aggressive investor.” Sadly, these simplistic investment risk tolerance questionnaires are just a way for securities industry sales people to push you forward through a well-honed process of selling you overly expensive investment securities products that will drive up their sales commissions and bonuses and the profits of their financial services company employer. However, from the point-of-view of your best interests, it is very important to measure much more carefully your risk tolerance regarding the expected investment risk versus reward composition of your portfolio’s asset allocation percentages.

There is an inexpensive way for you to get a much better assessment of your risk tolerance than you would from a simple conservative versus aggressive financial industry investor questionnaire.

You can complete an investment risk tolerance assessment survey online, and you do not have to work with any financial industry intermediary or financial advisor to do so. Furthermore, by doing this investment risk tolerance analysis yourself, you can separate the process of assessing your investment risk tolerance from the financial industry’s product sales process. By doing so, you can give yourself the alternative of buying very low cost and broadly diversified index fund investments directly from low-cost mutual fund vendors. Industry intermediaries tend to sell only high cost investments that pay them high fees and/or high commissions. Often associated with high pressure securities sales efforts, these higher fees and commissions come out of your pocket and can really damage your long-term finances. You pay more and get less. Click here to learn about: Investment Fees

If you want to do an online survey to assess your personal investment risk tolerance, you can do so at MyRiskTolerance.com, which is a product of Finametrica. Their website explains it all, so I will not repeat their materials here.

Finametrica has a scientific process for the assessment of personal risk preferences. Their survey has some sound economic and social science behind it, plus they have a growing dataset of other survey respondents against which your responses are compared. This is one of the more tricky parts about personal risk preferences and setting an asset allocation strategy.

The objective of personal investment risk tolerance analysis is not just to measure one’s desire to avoid risk, because almost all people are risk averse investors. The goal of proper investment risk tolerance analysis is to assess your personal risk preferences against the backdrop of a representative sample of other investors.

Finametrica has a database of tens of thousands of other investors who have already completed the questionnaire from major developed, English speaking countries around the world, including the US, UK, Canada, New Zealand, and Australia (where they are based). (There also is a French Canadian risk tolerance questionnaire available.)

You should note that there is absolutely no business relationship of any kind between this MyFinancialFreedomPlan.com website and Finametrica’s MyRiskTolerance.com website. This not a paid review or recommendation of any kind, and this website will not receive compensation of any kind, if you decide to use Finametrica’s investment risk tolerance questionnaire.

Here is a durable link to this survey that we maintain on The Skilled Investor website: Investment Risk Analysis Just click this investment risk analysis link and you will be redirected to the investment risk tolerance survey on the MyRiskTolerance.com. When you get to the MyRiskTolerance.com website, read the page and then just click the link entitled “Click here to do your FinaMetrica Risk Profile online” near the bottom of the text in that page. If you want to learn more, follow the links in the blue horizontal bar that will lead you to other information on their website.

Here are a couple of hints as to how to do this online investment risk tolerance survey. If you decide to go ahead with the MyRiskTolerance.com questionnaire, remember to use an Internet Explorer browser, because the IE browser works with the WorldPay system that they use. The company is based in Australia, and they do not use PayPal. The survey costs $45 in US dollars for one or two people to use. (Obviously, Finametrica’s prices are subject to change without notice, and they set their own prices. Survey prices are different for other countries.)

If two people are going to complete the survey, then each person should fill out the survey separately and then compare results, after both have completed their investment risk survey independently. From a process standpoint, the first person orders and completes their survey, and then Finametrica will send a token via email for the second person to log in to the website and complete their survey. Remember to save off a printable copy of each person’s survey results to your home machine.

The personalized investment risk tolerance analysis profiles that you get after you complete the questionnaire are detailed and very informative. They explain your results and compare them to the responses of others who have completed the survey before you. When the particular answers that you give differ from the responses of other investors who have a similar investment risk tolerance profile to yours, these differences are explained to you.

With your personalized risk tolerance analysis, you can do a better job of determining your portfolio asset allocation percentages. Then, you can buy the needed low cost, broadly diversified, passively managed index funds to fill out the asset allocation of your portfolio directly from the lowest cost vendor or via a discount broker.

This free financial information site publishes articles on how to develop a self-directed personal financial planning program strategy

The financial and investment planning articles on this free website supply important ideas to families and individuals about personal finance plan issues that they should take into consideration. These essays help in developing a lifetime family financial planning strategy. A fully personalized lifetime financial plan also depends upon using the best financial planning tool you can get. On our front page, you to find the best all-in-one lifetime financial planning calculator, including the top financial retirement plan program, a high quality personal budget planner, and the leading investment projection calculators for your personal finance planning.

Post-financial crisis commentary on tactical versus strategic asset allocation

The best individual financial planning and investment rules and practices are enduring and should not change due to market cycles or a financial crisis. This article looks at asset allocation strategy in light of the recent credit crisis.

The credit crisis was a systemic, global financial event that impacted any financial or securities instrument influenced by debt and borrower credit worthiness. In short, the credit crisis affected everything. So many investors sought liquidity at the same time, because they either had to do so to meet their cash flow obligations and/or they feared greater losses and sought “safer” places for their money. Presto — the result was a global valuation downdraft that affected all asset classes. While some — but not all — classes of bonds did better relative to other asset classes, the real beneficiaries were those who already held bond positions before broader groups of investors got into a panic.

Whenever you are already there and invested in an asset class, it means that you probably were already following a passive asset allocation strategy. While tactical asset allocation strategy advocates will suggest that you can anticipate the crowd, this is not verified by studies of flows-of-funds into and out of investment mutual funds. While a very narrow segment of investors might have some skill in anticipating trends and does actively pre-position their investments relative to the movement of the crowds, most people already have their money invested in an asset class, because they have chosen strategically to be invested in that asset class for the long-term as a buy-and-hold investor. Flow-of-funds studies show that almost all tactical asset allocation fund flows are late money flows that chase performance after valuations have already moved. On average, this tactical asset allocation money is late money and these investors get inferior returns.

At the end of the first decade of the new millennium, huge cash flows into bond funds still continued relative to flows into other asset classes, such as stocks. This is a trend that was almost three years in the making. We have not seen similar disproportionate fund flows into bonds since the 1984 to 1987 period, when interest rates were much higher than today’s paltry yields. In succession during the past decade, we have experienced a technology bubble market crash, a housing bubble crash, a credit crunch, and a resulting global economic/business cycle crash. Barring a total global economic depression, which we seem to have skirted but avoided, what will happen to the bond markets when interest rates inevitably rise? Stay tuned for the next sector bubble crash.

Recently, there has been more advocacy of “tactical” asset allocation strategies by certain financial advisors. The logic goes as follows. Broad passively-managed asset class diversification strategies seemingly did not work during the credit crisis. Even broadly diversified investor portfolios went down, although not as much as portfolios that were more exposed to particular asset classes that had suffered the worst percentage declines. Therefore, buy-and-hold strategic asset allocation apparently did not work and should be thrown out. As a replacement, these financial advisors advocate that it is time to employ tactical asset allocation strategies that ‘could’ get better risk-adjusted portfolio returns in the future. You know, start moving things around to get ahead of the crowd and be there before the crowd arrives to drive up valuations.

Unfortunately, tactical asset allocation strategy advocates do not offer anything to back up their claims that tactical investment activity would actually be superior to a passive asset allocation strategy in the future. Tactical asset allocation strategies have not been superior in the past. Advocacy for tactical asset allocation strategies flies in the face of the broad body of investment research that consistently has shown that low-cost, broadly diversified, passive buy-and-hold asset allocation strategies tend to yield superior long-term risk-adjusted portfolio returns.

Broad portfolio diversification has never meant that a portfolio could not and would not experience short-term losses at the portfolio level. When you have an investment banking industry that finds clever ways to repackage smelly sub-prime mortgages as gilt-edged investment grade derivative mortgage securities and resells these stinkers in vast quantities to other “smart money” financial professionals across the banking and investment world, then we just might all have a problem. When doing this over and over gets a lot of clever investment banking types some very large bonuses, then there is a lot of motivation to keep that gravy train moving along.

While you might question the ethics of these clever investment bankers, you should not forget that they sold these toxic mortgage securities to other willing professional buyers in the global banking industry. Those professional banker purchasers, in turn, tucked these gilt-edged derivative securities into their banks’ capital asset portfolios — the very capital portfolios upon which the banks ran their leveraged loan operations. When the music stopped and all the emperors had no clothes, bank capital evaporated and so did their ability and willingness to make loans. Of course, this was all compounded by tens of trillions of dollars in CDOs (credit default swaps) that tried to pass the ultimate repayment responsibility for bad debt hot potatoes around. Did the investment bankers also make some sweet bonuses on the multi-trillion dollar CDO market? You betcha!

Without your taxpayer dollars via the TARP bank bailout, the US and the rest of the world would all be in the financial black hole of a long-term global financial depression. In that event, most people would not have had to worry about short-term paper losses on their investment portfolios. Instead, many would have liquidated their portfolio holdings at cents on the dollar to meet living expenses after their jobs vanished.

If you have been following the chatter, you might remember hearing that most TARP funds have been paid back and some TARP loans to the banking industry have been reasonably profitable. Of course, this supposed profitability is only positive from a very narrow perspective. Taypayers are not normally in the business of making bailout loans to the financial industry. While unfortunately necessary, it is difficult to argue that TARP loans were profitable to taxpayers, when you consider the vast global economic destruction that resulted; the job losses and the millions unemployed and under-employed; and the unreimbursed hole that many still have in their personal investment portfolios.

So, when a huge and systemic toxic asset problem exists in the financial system, and the credit house of cards begins to fall, why would or should a diversified strategic asset allocation strategy prevent a short-term loss at the portfolio level? And, why would tactical asset allocation be a superior replacement strategy? To the contrary, higher cost, less diversified, active investment strategies will do what they always do, which is lead on average to inferior risk-adusted returns at the porfolio level. Even in a dire financial crisis, you should not lose sight of the long-term and forget the lessons of financial history. Broadly diversified, passive, low-cost, buy-and-hold strategies have been superior in the past, and they are much more likely to beat tactical asset allocation strategies in the future.

Click here for a more extensive article on personal Investment Asset Allocation

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Gauge the level of your portfolio’s overall diversification with this free on-line tool

Whenever you invest in multiple mutual funds and ETFs, you may wonder how broadly and appropriately diversified your aggregate portfolio might be. Have your investment holdings and mutual funds that you have chosen increased the global diversification of your personal financial asset portfolio? Do they just duplicate what you already own?

There is a free on-line tool that you can use to measure your portfolio diversification, and better understand the relative contribution that each of your investments makes to your goal of holding a broadly diversified global investment portfolio. On the Morningstar website, you can find their “Instant X-Ray” tool. Go to the Morningstar site at http://www.morningstar.com/

Click the “Tools” tab in the horizontal bar, select the “Morningstar Tools” pull down menu, and then choose “Instant X-Ray.” To go directly to this tool, use this URL:
http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx

To use the Instant X-Ray Tool, just enter the ticker symbols for all of the mutual funds, ETFs, and individual securities that you own or intend to own with the dollar value of each holding. Then, click “Show Instant X-Ray” to see a summary of your overall portfolio.

Note that when you enter only one mutual fund or ETF ticker symbol or only one stock or bond holding into the Instant X-Ray Tool, the summary provides data for that single fund or security. This can be very useful, as you evaluate individual investment funds and investment securities. When you enter multiple funds, you will get an overview that blends all the funds and securities in proportion to the dollar values that you enter for each holding.

This free Instant X-Ray summary provides a variety of data about your overall portfolio. The overview allows you to evaluate how diversified your portfolio is on a variety of dimensions, including the major dimensions that are summarized in the other articles on this website about selecting a broadly diversified investment portfolio. (See the Sitemap for these articles.)

Incidentally, if you click on the other views that are offered with the Instant X-Ray tool, then Morningstar will try to get you to sign up for a “Premium” subscription. The information provided by this free summary overview in the Instant X-Ray tool is sufficient, and you are not required to pay for a premium subscription.

Note that there is no relationship between this website and Morningstar, and this website did not receive any form of consideration, financial or otherwise, to write this article. The “Instant X-Ray” is a useful financial tool for individual investors, and that is why we have provided this article.

Comprehensive personal financial planning software is needed to develop a fully personalized family financial strategy

This free “financial freedom guide” on how to invest is just a part of our web site about how to develop a personal family financial plan

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Personal investing seems incredibly complex, but the best investment strategy also tends to be a more simple investment strategy

This complexity is driven by the nature of investing in securities of highly uncertain and unknowable future values. This complexity is greatly exacerbated by the proliferation of investment products and services aggressively promoted by a securities and financial services industry that purports to serve your best interests. However, this proliferation of complex investment products very often seems only to serve the financial interests of the securities industry itself. Averaged across all retail investors, the high fees of the financial service industry dramatically reduce rather than help to increase retail investors’ net assets.

Personal investing can be simplified greatly by focusing only on valid strategies that have support in the investment research literature. This personal investment planning summary is intended to help you to understand that you can manage your investments using strategies that have a demonstrated basis in the research literature. When one pursues strategies that are designed to focus solely on the fiduciary interests of individual investors, the vast majority of investment products promoted by the industry can simply be eliminated from consideration. They cost far more than they are worth.

Once you have committed to a durable long-term investment strategy, you can manage by yourself relatively easily the details of investment implementation. You do not need to pay high costs for something you can do yourself.

You can build an easy-to-manage, do-it-yourself, lifetime investment strategy based upon these principles:

• To improve your long-term investment returns, move fully toward the completely passive, globally diversified, and extremely low cost end of the investment securities products spectrum. Invest only in a variety of passive, very broadly diversified, and low cost investment funds.

• Understand better your investment risk tolerance relative to the larger population of investors and decide how much you are willing to be exposed to investment risk. Your investment risk tolerance leads to your asset allocation strategy, which sets the balance of overall expected investment risk and return in your personal portfolio.

• Get invested and stay invested in the global securities markets according to your asset allocation — through thick and thin. Never attempt to second-guess the markets or to time the markets by moving assets around hoping to beat the markets. The academic research shows clearly that nobody really knows how to time the markets and jumping in/out when you are confident/scared usually leads to inferior results.

• Buy and hold and hold and hold. When you own broadly diversified, passive index investment funds, professional investment portfolio managers will make all the needed adjustments within these funds for you over time.

• Maintain your asset allocation within the percentage policy variance that you have pre-determined. Do so in as low cost a manner as is reasonably possible. Use asset purchases during your accumulation periods and asset sales during your divestment periods to maintain your target asset allocation. This reduces the need to make changes and incur costs solely to maintain your asset allocation.

• Only buy investment mutual funds from mutual fund companies that deal directly with the public. Only buy exchange-traded funds (ETFs) through discount brokers. Never pay any broker or any other commissioned financial advisor another dime during your lifetime to tell you what funds you should buy. They do not know what will happen to future asset values, because they have no information to make such judgments. Instead, their high advisory costs will be extracted from your assets up front and along the way. Purchasing investment funds through an advisor is far more likely to reduce rather than increase your wealth. Investment cost are not “just a few percent.” For the average investor, average investment costs consume about one-third of average annual investment returns — year after year after year after year. The cumulative losses to even average investment costs are huge and simply horrendous.

• Improve your overall net investment portfolio returns by consciously managing the asset “tax location” of your investment assets, which can reduce the investment taxes that you pay. Federal capital gains investment tax rates vary by holding period and different types of assets have returns that are treated differently under the federal tax code. Take advantage of the opportunities that you have to arrange your assets for minimal taxation.

• Focus the time that you spend on financial affairs during your lifetime on increasing your income and/or managing your consumption to increase your savings rate. In addition to reducing your investment costs, saving more is the single most effective way to accumulate assets for retirement and other personal finance goals.

• Enjoy your life and resist the compulsion to act as an amateur investment portfolio manager. By ceasing their amateur investment management activities, most people can free up substantial amounts of time to spend on far more pleasurable activities.

The vast majority of people waste time on investment activities, tactics, and strategies that are more likely to reduce rather than increase their investment portfolios.

Professional, low cost index fund managers can manage your money far more efficiently in terms of better returns, lower taxes, and far less time than you can ever realistically hope to achieve as a personal investment portfolio manager. If you simply cannot resist the temptation to play investment portfolio manager, then understand clearly that this is a hobby, which is highly likely to cost you money through inferior returns, and this hobby is extremely likely to waste a significant amount of your valuable time in life.

Despite these factors, some people just cannot resist the personal investment management game. If you want to do this, then never play with the rent money and baby’s milk money. Never allocate more than 10% of your overall investment assets to this hobby. Invest the remaining 90+% in accordance with the investment methods summarized above. In addition, learn how to track accurately your investment performance relative to appropriate passive benchmarks, so that you do not fool yourself into thinking you have more skill than you actually do. Academic research clearly demonstrates that individuals usually achieve sub-optimal investment results.

You investments should work for you rather than you working for them. Avoid all the financial industry games designed to make money off of your assets. Instead, simplify your investment program, and use your financial assets to enrich and protect your life and the lives of those you love.

OK — So How Does One Go About Doing This?

Here are some ideas to get you going:

1) On the “Personal Finance Software” front page of this website, you can read about VeriPlan, which is an automated personal financial planning software tool that individuals and families can use to do their own lifetime financial plans. VeriPlan is the most sophisticated and high quality financial planning software that you can buy at a great bargain price. VeriPlan automates all of the tedious calculations needed to do fully integrated lifetime financial planning in a manner that is customized to reflect your particular financial situation, all your financial resources, and all your financial life goals and objectives.

Furthermore, VeriPlan also provides very extensive and absolutely objective personal financial planning documentation that helps you to understand the lifetime financial planning process. While VeriPlan hides the complexity of millions of inter-related financial projection calculations, it also treats you like an adult! VeriPlan was designed with the firm belief that smart, well-educated adults need and want well-designed financial decision support tools. If you are going to invest the time needed to plan your family’s financial future, you need a financial planning software “power tool” to help you. It must be highly functional and robust, while it also provides useful and entirely objective financial information.

2) In parallel with checking out VeriPlan, you might also want take a look at this “Financial Planning Reading List.” This reading list compiles the top 60 or so personal financial planning and personal investment management articles from the many hundreds that the designer of VeriPlan has published on various personal finance websites across the web. All of these “Financial Planning Reading List” articles were personally researched and written by the designer of VeriPlan. If you want to judge whether VeriPlan could be right for you, then these articles might help you with your decision. Furthermore, the more articles on this reading list that you read, the better prepared you will be to manage your own family financial planning and personal investment portfolio over your lifetime.