Assessing Risk Tolerance

In class we have been discussing risk tolerance little bit, with respect to industries as a whole, as well as particular companies, and individuals’ portfolios. So I decided to learn a little bit more about how risk tolerance is assessed, and find some instances to view risk tolerance. One thing I find interesting is how individuals assess their own risk tolerance in deciding what investments to choose and how to keep their finances on track.

First of all risk tolerance, like discussed in class is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. I read an article from Consumer Reports Money Advisor that had very detailed information for investors on how to assess their personal risk tolerance on a variety of levels. I feel like this is a really important thing for investors to do on a frequent basis, especially given the high level of volatility in the market today. Assessing one’s risk tolerance helps plan for the future, and like the article stated “Determining your risk tolerance is essential.
You don’t want to react emotionally when the market tumbles.”

An additional aspect of the article that I found interesting was it offered resources for people to learn more about the risk and rewards associated with their investing activities. I think that often times people simply listen to the media when making financial decisions, and end up selling low, and then get back in when the media say that the market is starting to run up, even though it may not always work out like planned. By being better informed and educated about the market, people will be able to make better decisions in the diversification of their portfolios. One great resource the article gives readers is www.vanguard.com. Vanguard’s website offers an online risk-tolerance questionnaire, with relevant suggestions on how to apportion one’s money between stocks, bonds, and cash. This is very helpful so that investors can calculate how risk tolerant they are, and how much they could lose given their investment choices.

Additionally, the article also discussed other need’s one has in order to protect themselves from risks in life. One of the main issues discussed was life and health insurance. The article explains that most people do not buy nearly enough coverage to protect themselves. For life insurance in particular, “They rely on old rules of thumb, like buying coverage equal to six times their annual income. This method doesn’t take into account your financial goals, like putting your children through college or providing a comfortable retirement income for your surviving spouse.” I feel like it is very important for people to be well insurance, especially with regard to health insurance (and life insurance depending on age). I have a few friends that don’t have health insurance at all, and it is a scary thought that they may get very sick, and not have access to the medical treatment that they need. I feel like this is another level of measuring one’s risk tolerance. Sometimes, it seems that individuals view themselves as completely free of risk. But, individuals need to take a step back and see all that they could possibly lose, and all that is at risk.

From the article, I gained an even better understanding of risk tolerance and the importance of it in an individual perspective. I think that is clearly shows that it is beneficial to really consider one’s risk tolerance before entering into investments for a portfolio, or other risky aspects of life. This can help an individual personalize the correct portfolio for themselves based on their particular risk tolerance and how much uncertainty and possibility of losses they can handle.

Consumer Reports Money Advisor

Vanguard