Notes on Risk Tolerance in Investing

Importance of Risk Tolerance

• Risk tolerance is crucial in making investment decisions.
• It varies from person to person.

Different Perspectives on Risk

• Risk Definition Variations:
  • Complete Loss: For some, risk means losing the entire investment.
  • Minor Loss: For others, it might be a decrease in value (e.g., $100 to $90).
  • Underperformance: Some might view risk as not achieving expected growth (e.g., expecting $110 but only reaching $105).

Key Considerations for Investors

• Comfort with Investments:
  • Understand the investments you choose.
  • Lack of understanding can lead to poor investment outcomes.
• Investment Balance:
  • Diversifying investments (aggressive vs. conservative) can help manage risk.

Self-Assessment Questions

• If you invested $10,000, what level of risk feels too high?
• Assess your comfort level with market fluctuations.

Market Behavior

• Markets will fluctuate (go up and down) and this is often beyond individual control.
• It’s essential to follow an investment plan that aligns with your risk tolerance.

Sleep at Night Factor

• Personality and Risk Tolerance:
  • If you can invest without worrying, you may handle more aggressive investments.
  • If you find yourself stressed and anxious about your investments, you may be too aggressive for your risk tolerance.

Conclusion

• When selecting investments, consider:
  • Your personal feelings about risk
  • Your overall financial situation before making decisions.