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Can you increase your risk tolerance?
By JLP | June 19, 2008
I do not like risk. When I take those tests designed to determine your risk tolerance, they always comes back “moderately conservative” or some variation thereof. I’m not completely risk averse, but I’d definitely prefer not to risk too much.
With that in mind, I’ve been wondering whether it’s possible to increase my risk tolerance. I’ll be back later today with more on the subject, but in the meantime:
Do you think it’s possible to increase your risk tolerance, and if so, how?
Topics: Miscellaneous | 11 Comments »
June 19th, 2008 at 8:38 am
I don’t think you should have to increase your risk tolerance. It’s like pretending to be someone you aren’t.
Just use your head and only do what you are comfortable with.
You don’t have to follow the herd, trust your gut.
Drew
June 19th, 2008 at 9:29 am
I have felt that risk tolerance is a misleading term. A better term is loss tolerance. And I have found that while there are large numbers of questionaires to measure risk/loss tolerance, this really can only be accurately measured by living through a down market and some losses. Then one really knows their true loss tolerance.
June 19th, 2008 at 9:31 am
I’m not a risk taker when it comes to things where the odds are not in my favor. For example, I don’t spend a lot of money at casinos, or make bets with friends when I don’t have an advantage.
With the stock market however, I feel a little more risk is necessary. (I don’t buy individual stocks, just mutual funds, trying to make the switch to all indexes at that.)
The point I’m trying to make from a financial standpoint, is to play the odds. If you’re in it for the long term don’t let the day to day numbers influence you. Look at today’s conditions as an opportunity to invest, not as a risky market.
June 19th, 2008 at 10:00 am
I’ve found that the more I read and educate myself on investing and markets that I’ve increased my risk tolerance. I’ve also found that the more prosperous I’ve become the greater my risk tolerance is (cause I know I can make up for any loses as long as I’m not completely exposed in one sector). The point of risk tolerance is to be properly diversified – this greatly reduces risk and it does include cash, not just equities.
I basically take a two prong approach to risk – retirement and other savings. My retirement is generally quite conservative – mostly index funds and dividend paying stocks. I don’t think there is a company in any of my retirement portfolios that you wouldn’t have heard of.
My general savings though is another matter. Whereas none of my retirement is in cash, quite a bit of my general savings is in cash (20%) – that’s conservative. But the rest is in equities – most of which are growth oriented, pay fewer dividends, and are more risky (but also more rewarding).
My reasoning is that retirement is something I don’t want to screw up, its my safety net. Not that I want to screw up my general savings, but that money is much less important in the scheme of things – it might mean the difference between buying a new car in the future vs. used or a 3000 sq. ft home instead of 2500 sq ft. But I’m willing to weigh the risk of doing better than average in my personal savings.
I think the more you read about investing and the more you learn about yourself in down markets (such as now) then you’ll be better able to “increase” your risk tolerance. Or perhaps the correct way to state it is you’ll better understand your risk tolerance.
June 19th, 2008 at 12:31 pm
Risk tolerance = fear for most individual investors. You reduce fear by exposure or familiarity, which means you try it. You’ll have a very tough time being less fearful until you gain experience, which you won’t get by avoidance.
June 19th, 2008 at 2:51 pm
I don’t believe that this is a variable that you can just alter overnight. I think that we all like reassurance that we will have secure investments. Unfortunately some of us like more risk and some of us like the rest. I believe that giving your money to someone else to invest for you is the greatest risk you can take.
June 19th, 2008 at 3:14 pm
Amen to what Jerry says about the greatest risk being giving your money to someone else to manage. And to go along with my previous post the more I read and educate myself about investing the more I feel this way about financial managers.
June 19th, 2008 at 3:30 pm
I’m mainly in beaten down blue chips, small cap value, and a few high yield diversified junk bond closed-end funds. Most of these pay 3%+ dividends (junk pays 10%+). So one might say that if I was speculating in capital appreciation, this would be quite risky, but since I mainly focus on steady yield first, price to tangible book value second, and growth third, it is not very risky from that perspective.
My diversification is not restricted to the stock market. I have several income streams and I know how to live comfortably on very little, hence market losses are not a big deal (although they do make me grumpy).
Enough about me. You can increase your tolerance by changing the perception you have of risk. The “easiest” way is to try the “risky” activity and realize that it’s probably not as bad as expected.
June 19th, 2008 at 3:46 pm
I agree with Transcendental Success: risk tolerance is really is a measure of fear. That isn’t easy to change as its part of your personality. However, if you decide you really do want to change you can desensitize yourself by taking small steps. When you take the small steps and find the results are good or even not too bad it will give you courage to make further steps.
For investing, desensitization can be hard since there will be a lag between your behavior and the outcome. You could try slowly increasing your equities holdings… If the market goes down and your portfolio decreases, you could try contributing the same amount (or even a bit more). You could NOT follow financial news very much- if you own index funds it shouldn’t really matter anyway. Also, news is predominantly bad new since that sells better!
I’ve also read a suggestion that a written plan can help too: i.e. Plan what to do when the market drops 20% (note I said when not if!)
-Rick
June 20th, 2008 at 3:12 am
I think you can increase your risk tolerance. It requires training yourself to see a different kind of risk. For instance, what about the risk of inflation rising faster than your investments?
Most people think of just the risk of losing money, not the risk of not making money grow fast enough.
June 20th, 2008 at 7:36 pm
I differ from KC to a degree. I am recently retired, and the first ten to twelve years of my retirement funds are ALL in cash, laddered CDs yielding an average of 5.75%. I don’t have to worry about the market ups and downs, since I won’t have to touch my equity and bond portfolio for quite some time.
Now, that may strike some as overly conservative, but with the market volatility of late, it does help me sleep better.
Yours,
Bozo