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F. Frequently Asked Questions
Q. What is risk tolerance?
A. How much volatility in your portfolio that you can accept in order to achieve your investment goals.
Q. How do I determine my risk tolerance?
A. That is the million-dollar question. Obviously, we would want to take no risk and make a lot of money.
Unfortunately, the market doesn't work that way. Generally, the more risk you take, the higher the potential rewards will be.
With that, the more risk you take, the greater the chance that you could lose a significant portion or all of your investment.
A place to start is to come up with a rate of return on your investment that is acceptable to you. Be realistic when you are
thinking of this figure. In our opinion, the safest investment in the world is the U.S. T-Bill. As of 2/10/02, the rate of return is an annualized rate of roughly 2%. If you had a very low risk tolerance, a portfolio of T-Bills would be appropriate. Some high growth technology stocks have been know to double in value in less than a year. These same types of stocks have also been known to go bankrupt. If you had a very high tolerance for risk and were willing to risk all your money in an effort to achieve very high returns, a portfolio comprised of nothing but high growth stocks could be appropriate. Most individuals are in between of these two extremes.
Q. What is a realistic goal for the average investor?
A. We believe for the average American family, if you can earn, over the course of time, 5%-10% over the inflation rate, you have done well.
Q. What if I can't make a reasonable assessment of my tolerance, but I still want to invest in the stock market?
A. That's normal and the reason why you are with Woodstock Discount. We will advise you on what we believe should be your risk tolerance. If you go to your physician and he or she recommends you to get a flu shot, you might not want to because you have a very low tolerance for pain. But, your doctor advises you that you need that shot. And, you do. You will still get the shot. If your investment need are a particular investment, and we advise you that you should be in that investment, you should be in it. Even though, you might feel it too risky---just like that flu shot might hurt. Once you are educated on the risks, you will feel more comfortable with the investment. Now, the final decision is yours to make. Just like you can walk out of the doctor's office and not get the recommended shot, you do not have to follow our investment recommendation.
Q. What does it mean to be diversified?
A. We believe diversification; as it pertains to an investment portfolio, mean to be invested in different industries
and asset classes. Three different asset classes are common stocks, bonds, and preferred stocks. A diversified portfolio of individual
securities might contain a basket of common stocks, a basket of investment grade corporate bonds, and a money market fund.
Please see our Woodstock Discount rules for common sense investing. A diversified portfolio of mutual funds might contain a money market fund,
corporate bond fund, growth fund, and an equity income fund.
Q. How many different investments does it take to be diversified?
A. There is no correct number. But, there are correct strategies. If you invest in individual stocks only, we recommend, at a MINIMUM you should own stocks in at least four sectors, and
own at least two stocks in each sector.
Q. What about diversification in mutual funds?
A. Mutual Funds are divided into two types: diversified or non-diversified. You can tell by reading the prospectus. Woodstock discount only recommends diversified funds. If you invest in mutual funds, we believe you should have at least two with different investment styles. For example, for the equity portion of your portfolio, you might own one growth fund and one equity income fund. For the bond portion of your portfolio, you might own one investment grade corporate bond fund and one government securities fund. You would be diversified in this case.
Q. Why would I invest in a mutual fund instead of individual stocks or individual bonds?
A. Very simple. You do it to give the investment decision to someone else. You might not have the time to monitor individual stocks and bonds or the skill to manage a portfolio effectively. By investing in a mutual fund, you are hiring an experienced manager to make the investment decision.
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