Watching Grass Grow

The Investment Meter

Watching Grass Grow

The investment meter is a device that shows the scores of the five dimensions as percentages of the maximum possible for each category. It is another way to look at Risk Capacity and the resulting risk exposure. Each category is assigned a numerical weight according to its estimated contribution to Risk Capacity, and a weighted total score is then derived. The bar chart below shows your results in each category, and your overall Risk Capacity. Each category result is shown as a percentage of the maximum possible for that category. Then each category is assigned a numerical weight according to its estimated contribution to your capacity for risk and added for the weighted total score, also shown as a percentage of the maximum possible. A weighted total score of 100 indicates the highest capacity for risk.

Ten Dimensions of Risk

The 10 dimensions of risk are shown in the figure above and the method of measuring and weighting the categories are depicted in the investment meters in the two figures below. In the first figure, an individual’s five dimensions of capacity are shown with a meter depicting the scores obtained in a hypothetical risk capacity survey. The scale of measurement is on the left and the weighted average of each category is displayed in the column titled Overall Risk Capacity. Each category is assigned a numerical weight according to its contribution to risk capacity, and a weighted total score is then derived. In this case, it is a capacity level of 70. The table below is the allocation of indexes in Portfolio 70. This portfolio could now be regarded as this investor’s personal benchmark or the bull that can be ridden for the long run.

 

The Color of Risk Spectrum

The "color of risk spectrum" was created to correlate with various levels of risk and return. The light and cool colors are at the low risk level and the darker, brighter and warmer colors are in the middle and high end of the risk scale. See the two figures below.