It’s very easy, and very human, to seek to place blame for decisions
that don’t work out. A thousand factors can influence outcomes, but we
often discount the single biggest one: Our own reactions.
This really comes home when you think about driving. Modern
automobiles are cutting-edge when it comes to safety. We have airbags in
all directions, seatbelt laws are commonplace and most other drivers
are courteous to a fault.
Yes, a random truck could run a red light and kill you. Yes, bad
things happen all the time. But you do in fact control a lot of what
happens when you get behind the wheel. Getting foggy? Turn on your low
beams. Tired? Pull over and rest.
Most significantly, nearly any touchy traffic situation is most
quickly and easily remedied just by making the choice to slow down and
avoid whatever is ahead of you. That’s hard to do at high speeds on
slick roads, but driving fast in the rain is a choice you made, isn’t
it?
Investing isn’t that different. If you are the kind of person who freaks out when stocks drop a
half-percent in a day, you probably shouldn’t be 100% stocks. If you
own an individual company’s shares and find yourself obsessing over its
price daily or even hourly, maybe you shouldn’t buy individual shares.
If you’re one of those very thick-skinned types who can put money
into a fund and forget about it for years, great. Most of us aren’t, and
especially when balances get higher and start to feel like “real
money.”
Here’s the trick: Slow down and assess. Ask yourself a few basic investment risk questions:
1. If the stock market fell by 20% in the course of a few weeks, would I sell, hold or buy?
2. Do I honestly believe (and do my past actions show) that I prefer
investments that can decline substantially but promise better long-term
results?
3. Or, do I believe (and do my past actions show) that I prefer
investments that do not vary much in value but might have a lower
long-term performance result?
If you answered “sell” to question number one and affirmatively to
question number three, you’re a risk-averse investor by nature. If you
answered “buy” and affirmed number two, you are probably more comfortable with a higher-risk portfolio.
Down the middle? A portfolio that middling on risk is a better fit for you.
Investment risk reconsidered
You can, and should, be invested in a way that matches your ability
to manage your own reactions. Like slowing down in tight traffic, it
helps have time to gauge what’s going on and make better choices.
The ultimate investment portfolio is one that fits your personality
and promises to deliver the results you expect with a minimum of risk,
while doing so at the lowest possible cost. We all deserve to arrive at
our retirement goals on time, safe and sound. A risk-adjusted portfolio is thus a big step in the right direction for retirement-oriented investors.
Source: http://www.forbes.com/sites/mitchelltuchman/2014/08/04/your-biggest-investment-risk-is-you