To be sure, maybe people have found they have a whole new risk tolerance this year. Even investors who were ’safely’ index fund investing realized that even though they own the whole market, they still own stocks, and stocks by are risky investments.
The Finance Buff posts an interesting article on a way to determine your risk tolerance using a “loss-to-income” ratio, or, thinking of your loss in terms of your lost income. For example, a drop in the stock market causes you to lose 6-months worth of income from your investments, are you ok with that? Take a look at that article, it’s an interesting concept, since most risk-tolerance questionairres are so abstract in their questions.
Just to keep things interesting and balanced in perspective, here’s a post from out of left field by Tim Ferriss. He basically says his life is already risky, so his investments shouldn’t be. A different kind of asset allocation. He also says don’t invest in anything you don’t understand – a Warren Buffet-ism, if I’m not mistaken. Words to live by. Do your research.
How do you quantify your risk tolerance? Let us know in the comments if your tolerance has changed this year.
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I look at risk in the following way: If you are happy with your life and comfortable then your risk tolerance should be low and your investments should be extremely stable. If you are not happy and not comfortable then your risk tolerance should be high. Without risk there is no reward. If you want to change your situation then you need to take risks. Also note that the term “investment” is broad. It can be in the form of time, money, sacrifice, etc.
Interesting viewpoint – this goes along the lines of “if it ain’t broke, don’t fix it”. However, a year or two ago I read about another tactic in a business book or maybe WSJ, which resonated with me: “if it ain’t broke, then make it better”. The reasoning being, the time when something is working is exactly the time when you have the ability to think long term, fine-tune, and improve. When you are hanging on by a thread, it’s hard to think long term and make good decisions.
I still totally agree that there is no reward when there is no risk, and that if you want to change your situation you need to take risks.