Risk tolerance, by definition, is the amount of risk you are willing to sustain in relation to reward. There is an old saying: “With reward comes risk, and with risk comes reward... sometimes.” Nowhere is there a guarantee that if you invest in a more risky or aggressive investment that your reward will commensurate. In the times that we are in, human emotion tends to take over from rational thinking. Fear of losing principal or previously made gains, not having enough funds to retirement or acquire that elusive beach house or Sunday car, or disappointing earnings in general. Disappointment sometimes makes us do (dumb) things we would not ordinarily do, like alter our habits or change our way of thinking. That, my friends, is when things can go terribly wrong.
Investing, in general, is as different for all of us as we are all different. Risk has many meanings and definitions: risk of losing, inflation risk, purchasing power risk, interest rate risk…well, you get the picture. In addition, we all have our own view of losing: a few dollars or a few thousand- it’s different to all of us. So how do we keep our sanity in a world that seems to be unraveling at its very core? Calmly, for starters...
Let’s go back to the times where the markets were sane and rational. A few points up or down meant a normal day. What was your risk tolerance then? Where you a growth investor, with no need for income, or an income investor who was utilizing your portfolio to subsidize your income? The first step is to determine what your goals and objectives are of your investments, and the reason you are investing. If you have a retirement fund, how many years do you have to retirement, and will you continue to make contributions? If a college fund, how old is the child and how many more years until its freshman time? It’s time for a reality check: take a breath and look at the big picture. While I can’t tell you how to adjust your portfolio, I can advise you to take a good, long look at why you are investing in the first place, and remind yourself of your basic goals and objectives. Don’t be hasty, risky or out of character. Speak with your financial professional to review why you started investing and the discussions of previous meetings to remind yourself why you are (hopefully) saving on a regular basis.
With Greece and now Italy involved in a massive restructure, the Euro in jeopardy of disbanding, Spain next in line (and don’t forget there are 17-count ‘em 17 countries involved in the Eurozone) unemployment above 9% here, housing the worst it’s been in decades, try to remember that this too will pass. When, I can’t tell you. But take it from me... keep on course- brighter days are coming.