Calibrating Your Risk Tolerance

You can learn a lot about yourself as an investor on a single day. For many, Friday was one of those days. With trade war rhetoric heating up and the stock market melting down, you likely experienced some internal turbulence.

If the drop on Friday made you nervous about your portfolio to the point where you felt like pushing a button, you’re probably taking too much risk. If you felt calm and relaxed, chances are you could afford to take a little more of it. And if you experienced moderate discomfort without feeling the need to log on and check your balance, you’re doing it right.

Making decisions based on the news of the day is almost never a good idea. But if you recently discovered that your risk tolerance wasn’t properly calibrated, now might be an okay time to get to a place that lets you sleep at night, especially with the S&P 500 just 6% off its all-time high.* Good investing, I always say, isn’t about maximizing returns; It’s about maximizing returns you could reasonably expect to achieve.

With the ups and downs of the stock market tied to a single Twitter account, it feelslike there is more risk** than normal because we can identify exactly where it’s coming from. But don’t kid yourself, stocks are never more or less risky, they always have the potential to do what they do.

There are two ways that risk can ruin you: by taking way too much of it or taking way too little. The sooner you can properly calibrate your true risk tolerance, the better off you’ll be.

*”But Michael, I thought market timing was bad.” That’s not what I’m saying. I’m saying that in a decade of mostly rising prices, it’s easy to bite off more risk than you can chew. If you recently found yourself in that place, then it’s okay to do something about it. Now, if you take your stock exposure down and then back up should a trade deal be announced, then that’s something else entirely. That’s one of the worst forms of speculating.

**Sometimes, most of the time, risk=volatility.