Advertisement
investing

Investors, How Much Risk Can You Stand?

If you are taking on more risk than you can emotionally tolerate, you’ll hit the panic button and sell at the worst possible time.

The investing world is full of unknowns these days. We’re grappling with a new—and very different—administration in Washington, along with more-familiar concerns about the economy, corporate earnings and geopolitical developments. The only certainty is that volatility will escalate, so be prepared for a few gut checks as the market zigs and zags. Knowing more about your tolerance for risk can help you design a portfolio that will ensure you can meet your goals without losing sleep.

But recognize that such de-risking comes with the trade-off of diminished rewards. Maybe you’ll have to retire at age 67 instead of 65, or maybe you’ll decide to spend less and save more. Conversely, you might have an appetite for adventure when it comes to investing, but if you are only a year or two from retirement (or some other goal), then your capacity for risk taking with the assets required to meet that goal is virtually zero.

Advertisement - Article continues below

Nature, not nurture. One misconception about risk tolerance is that it varies with whatever is going on in the market. In fact, the psychological aspect of risk tolerance is just as much a part of your personality as, say, introversion or extroversion. Risk tolerance remains remarkably stable during market gyrations and throughout one’s lifetime (although major life events, such as marriage or the birth of children, can change your appetite for risk). Interestingly, risk tolerance is not necessarily consistent in all aspects of one’s life: You could be a stock market ninny who skydives or a gambler who likes to hug the right lane and drive just below the speed limit.

What can change with the market is your perception of risk, which wanes in boom times and waxes as markets head south. In other words, whatever your tolerance might be, a turbulent market can make you overestimate the level of risk. The best way to avoid any rash decisions is to maintain a well-diversified portfolio, which tends to smooth out returns over time, and to think long term. Don’t obsess over your account balances, and turn off TV financial commentators if they spook you.

The good news is that for many investors, extreme risk taking or risk avoidance is on the way out, according to 401(k) plan data from Fidelity Investments. Fifteen years ago, some 45% of savers had either 100% or 0% of assets invested in stocks. Now, only 12% of accounts are at those extremes, thanks in part to the advent of target-date funds, which automatically diversify holdings across assets that are appropriate for a specified time horizon.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020