Oct 4th, 2008
This is When Your Risk Tolerance is Really Defined
Risk tolerance is a subject that’s discussed a lot in investing. It means how much you can live with in terms of taking a chance with your money, typically meaning that in order to have more potential gain, you have to live with more potential loss, and if you only want to avoid losses, you can, but sacrifice the potential for larger gains. Some people have virtually no risk tolerance in investing–those are folks who need to be in investments like Certificates of Deposit and government issued notes, bills, and bonds or to bury their money in coffee cans welded shut in the back yard. On the other hand some will take huge risks by investing in a single stock with everything they have. If that stock is the next Google, they’ll be incredibly rich! If it becomes the next Pets.com, they’ll lose everything.
The vast majority of people would say their risk tolerance is somewhere in the middle. Where on that continuum you are is easy to overstate when the market is doing well; lots of folks say they’re very comfortable with stock market risk when the market is having the kind of run it did in 2003-2007, with positive returns every year. However, when a year like 2008 happens–with virtually the entire market in a tailspin–those who really have the risk tolerance they state to stay in the market actually do that: stay in the market. Those who don’t start heading for the exits.
You can tell the low tolerance group easily: they’re the ones who are saying that if you stay in, you’re a fool, and proudly declare how they moved everything into cash. They said they have risk tolerance, but they really didn’t. Of course, history shows that cashing out and moving to cash after a market dump tends to be exactly the opposite of the best decisions, but that doesn’t stop them.
Times like this say a lot about how much risk you’re willing to stomach.
As for me? I haven’t sold anything since my usual bit of changes in April of this year. How about you?
I’m so calm I’m not even looking deeply at my savings. I know my money is all in stuff that should ride this out over the long term, so I’m avoiding the heartache of seeing the bumpy road by not paying too much attention for now.
[...] people discover their risk tolerance is rather low, or lower than they thought, in stock market times such as these. If that is indeed the case, what [...]