I•
T•
’S Y•
O•
U•
R
William J. Lynott What Is Your True Tolerance For Risk?
S far back as 1792, when twenty-four stock brokers gathered under a buttonwood tree in Manhattan to form what was to become the New York Stock Exchange, most people understood that investing in stocks involved risk. That hasn’t changed, and today, most of us are well aware of the fact that no matter where we decide to keep our money, there will be a degree of risk involved. Even what is regarded as the safest investment of all, US Treasury bonds, carries some risk due to the effects of inflation on fixed returns. The same goes
A for
money stuffed under the mat- tress, which carries the added danger of being stolen by your ne’er-do-well brother-in-law who knows where you’re hiding it. Put simply, there is no place to put your money that will isolate it entirely from risk.
Of course, the degree of risk
varies sharply with the type of investments you decide to make. So-called junk bonds are re- garded as one of the riskiest in- vestments available, offering the possibility of high returns but car- rying with them the risk of sharp losses. In contrast, US Treasury obligations limit potential gains in exchange for a much lower level of risk.
All of this suggests that each of us needs to know and under- stand our own tolerance for risk
10 PHOTO: CORBIS
The conventional advice for most investors is to build a portfolio that is well balanced between high-return/high-risk and conservative investments.
when it comes to our personal finances, especially in this time of volatility in the stock market. With triple-digit changes in the Dow Jones Industrial Average, sometimes in a single day, up or down, risk tolerance is arguably more relevant than ever. The bet- ter you understand the degree of risk that you can tolerate, the more comfortable you’ll be with your selection of investments.
Determining Your Risk Tolerance
Are you the type of person who likes to “live on the edge,” someone who would like to go whitewater rafting on the Colo- rado River? If so, a portfolio heavily weighted with high-return/ high-risk investments may be what you need to keep your need for excitement satisfied even when you’re riding out a tempo- rary plunge in the stock market. On the other hand, if you’re afraid to ride a Ferris wheel because it
may crash or to buy a lottery ticket because of the poor odds of winning, it’s likely that you’ll sleep better at night with a port- folio consisting mostly of the “saf- est” investments. Of course, if you’re like most
people, you fall somewhere in between these two extremes, and that’s why the conventional ad- vice for investors is to build a portfolio that is well balanced be- tween high-return/high-risk and conservative investments. So, where do you stand on this scale of risk tolerance? What do you need to know about your- self that will help you handle your personal finances in a way that will help you sleep soundly at night? Behavioral economists agree that evaluating your own tolerance for risk can be a diffi- cult task, so they have devel- oped a series of questions to keep in mind as you evaluate your current portfolio and your tolerance for risk. Here are five
questions you may want ask yourself before making invest- ment decisions.
What Stage of Life Am I In? For most people, their risk tol- erance will change as they grow older. If you are in your fifties or sixties, you probably no longer consider yourself invulnerable to the fluctuations
of the market.
That’s why financial advisors sug- gest that you move your invest- ments toward the conservative side as the time when you will need this money draws nearer. With less time to ride out inevi- table downturns in the financial markets, it makes sense to tighten up your investment strat- egy as the years go by.
What Are My Financial Goals? Keep in mind the fact that dif- ferent financial goals should have different timelines. For instance, if you’re young enough to be sav- ing for a child’s education or a down payment on a new home, your risk tolerance will differ from that of a person who has already passed through these financially demanding stages of life and is now thinking only of the best course for building a solid retire- ment portfolio.
Have I Been through a Financial Trauma?
Certainly, anyone who remem- bers the Great Depression knows
M A R C H 2 0 1 1
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82