Investing is frequent topic on Future Proof, MD. I've shared several of my personal investing strategies with you in previous posts Why I Never Short a Stock..., Investing for Retirement - The Future Proof Way, and A Simple Step-wise Approach to Retirement Savings. I may have said multiple times these exact words "depending on your risk tolerance," so let's talk risk tolerance.
What is it?
Almost everything we do have risks, we risk getting food poisoning when we eat; we risk getting into an accident when we drive; we risk injuries when we play sports. The same goes for investing. "Risk tolerance" is exactly as it sounds - how much risk are you willing to tolerate in order to earn an anticipated return on your investments?
How to find out what your risk tolerance is?
Like a lot of things in life, the concept of risk tolerance is simple, but when you get into the details, it gets incredibly complicated. Many experts have tried to come up with methods to quantify your risk tolerance - here is a calculator hosted by Rutgers University and another hosted by CalcXML.com. However, like most topics in psychology, this is an inherently subjective matter and your answer is likely going to differ from another person's.
Future Proof Take
I don't use any calculators and I can't comment on the validity of their methods. My view on investment risk tolerance is simple - make sure it aligns with your risk tolerance in other areas in life. Because when it comes down to it, it's all about being able to sleep at night. Here is the completely unscientific, unproven Future Proof method for gauging investment risk tolerance provided ONLY for your entertainment:
- You're an avid skydiver (400 jumps and counting) - go all in on stocks.
- You want to try skydiving at some point in life, but not yet - go 70% stocks, 30% bonds.
- You think skydiving is too dangerous but you have no problem riding a motorcycle - go 50-50 stocks and bonds.
- You're worried about the safety of riding a motorcycle, but would like to try it at some point - go 30% stocks, 70% bonds.
- You think riding a motorcycle is too dangerous - go all in on bonds.
Final question - is this glass half full or half empty?