Measure your risk tolerance


As Stocks Gyrate, It’s Time to Measure Your Risk Tolerance

“Suddenly, they see risk everywhere and feel it acutely. Maybe you do, too. But here’s the problem with listening to them too much: It can make you sick to your stomach with fear. That can lead to hasty financial decisions and stock transactions that you may regret.

To combat those feelings, you can conduct a self-evaluation of your risk tolerance. Two companies, FinaMetrica and Riskalyze, have built businesses around these sorts of assessments. …

FinaMetrica’s 25 questions for investors is a Riskalyze’s exercise is at Theirs are not the only ones, either. The new robo-advisers, like Betterment and Wealthfront, have their own risk quizzes, as do a company called FinMason and many traditional brokerage firms. …

But first, what are we talking about when we say risk tolerance anyway? FinaMetrica’s co-founders do a good job of putting it in English in a paper they wrote in 2012. They say they believe that sorting out someone’s risk tolerance is just one of three crucial steps in figuring a person’s overall risk profile.

The first part of the process is determining how much risk is required for you to meet your goals: What annual return will you need on your investments to meet them, given what you think you can save? …

The second step is figuring out your risk capacity. Can your plan withstand major events that you may not expect, like a mentally ill adult child who requires expensive treatment, the death of a spouse or your own disability? …

Risk tolerance is the third and final step, and it’s all about feelings and personality. Precisely how does taking financial risks turn your stomach — or turn you on?

Continue reading the main story

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