Match investments with right risk tolerance level

Maximizing returns while minimizing risk. That's the investment objective of most investors. And one way of achieving that goal is through the careful diversification of your investment portfolio.

But just how much diversification is enough? Most financial planners agree that if you have several thousand dollars to invest, you should have at least some cash (or cash equivalents, like a money market account or Treasury bills), stocks and fixed income investments. Other possibilities might include real estate, precious metals, collectibles or other similar investments.

How much of your portfolio if any should be placed in any one type of investment at any given time depends on your personal circumstances. Your age, objectives and expectations as to returns, as well as the size of your portfolio and the amount of risk you are willing to take, all play a role in determining the proper mix of investment assets.

Yes, risk is a component of nearly every investment. How much risk you are willing or able to assume often plays a key role in making investment decisions.

Are you a risk-taker? Or are you a play-it-close-to-the-vest type? Here's a test you might want to take to measure your tolerance for risk.

1. What are your income needs?

a. I need a steady, current income from investments.

b. Current income is not important.

c. I don't need current investment income.

2. What is your investment time frame?

a. Short-term results are important to me.

b. Day-to-day changes in the financial markets don't bother me.

c. I invest primarily for the long haul.

3. How much can you afford to lose?

a. I can't tolerate any loss of capital.

b. I can accept temporary drops of 10 percent to 15 percent of my portfolio.

c. I can afford to lose 50 percent or more of my capital.

4. What are your expectations for investment returns?

a. I don't want to beat the market.

b. I want to match or slightly outperform the market.

c. Outperforming the market is very important to me.

5. To what extent do you need to protect against inflation?

a. Protecting my current income and my capital are more important than beating inflation.

b. I want current income, but I also want to beat inflation.

c. My investments must beat inflation.

Now award yourself one point for each "a" answer, two points for each "b" answer, and three points for each "c." Then add up your score.

If you scored five to seven points, you are or ought to be a conservative investor. Low risk investments, such as savings accounts, certificates of deposit, and Treasury securities may best fit your lack of tolerance for risk.

With a score of eight to 10 points, you are moderately conservative in your approach to investing. Bonds and other fixed income investments, as well as conservative stocks, probably suit your temperament.

With 11 to 13 points, you are likely to be able to be moderately aggressive in your investing. Growth stocks, real estate and similar investments may suit your needs.

And with 14 to 15 points, you are probably an aggressive risk-taker. Speculative stocks, "junk" bonds, and other higher-risk investments are likely to comprise part of your portfolio.

Of course, no simple test like this one can take the place of an in-depth review of your personal investment situation with a qualified investment advisor.