If you’re looking how to quantify risk tolerance and how to determine the appropriate exposure to stocks, you’ve come to the right place.
This post is also for someone who is wondering:
- Whether they have the proper asset allocation
- If there is a way to reduce investment stress while still benefitting from returns
- How to quantify their risk tolerance
- How to continue moving forward on their path to financial freedom despite all the uncertainty
One of my primary goals on Financial Samurai is to help readers build meaningful wealth in a risk-appropriate manner. You need to learn how to quantify risk tolerance before making the right amount of investments.
Because I started my career soon after the 1997 Asian Financial Crisis, I’ve experienced a lot of carnage as many international college students in the US had to drop out due to a sudden and massive devaluation of their respective home country’s currencies. I fully appreciate how hazardous the road to building great wealth can be.
Control Your Risk Exposure
Even the best-made plans can be laid to waste due to some unforeseen exogenous variable. We always hope for good surprises along the way. The coronavirus pandemic is certainly one of the biggest unforeseen black swan events in our lifetime.
Unfortunately, life always has a way of kicking us in the face after knocking us in the teeth. Let’s always be thankful for what we have and demonstrate kindness to those who are experiencing difficult times.
Most investors overestimate their risk tolerance, especially investors who’ve only been investing with significant capital since 2009. Once the losses start piling up, it’s not only the melancholy of losing money that starts getting to you, it’s the growing fear that your job might also be at risk.
The Richer You Are, The Harder You May Fall
You might also erroneously think that the richer you get, the higher your risk tolerance. After all, the more money you have, the bigger your buffer. This is a fallacy because the more money you have, the larger your potential loss. For most rational people, their lifestyles don’t inflate commensurately with their wealth. This is why even rich people can’t resist a free rubber chicken lunch.
Further, there will come a time when your investment returns have a larger impact on your net worth than your earnings. As a result, the richer you are, the more dismayed you will be to lose money. Your main hope for recovery is a rebound in investment performance because your work earnings won’t contribute much at all.