Finance Take five minutes to review your most recent portfolio statement. Did you focus more on the investments that are doing poorly? Or the ones that are doing well? Let’s be clear: no investor likes poor performance. But if you find yourself constantly thinking about holdings that aren’t living up to expectations, it could be a sign of a more conservative financial temperament, one that places a higher priority on preservation of capital than it does on growth of capital. Conversely, if you find yourself patting yourself on the back for the gains from a particular position, you likely have a more aggressive temperament and are more drawn to growth opportunities than you are to a “steady as she goes” approach. Think back to the last time you added a new position to your portfolio. Did you find yourself most concerned about it losing value? Or about gaining value? Another quick way to determine whether you’re more focused on investment downside or upside. Not surprisingly, those concerned more with new investments losing money tend to be more conservative investors, more inclined to invest in bonds and other fixed-income investments. Say the stock market lost about 25% of its value since the start of the year. Your investment in ABC stock has lost about the same amount during that time. What do you do? Thinking about how you react to a broader market downturn can be a good way to determine your overall risk tolerance. If you find yourself more inclined to sell, you likely have a lower tolerance for the market risk inherent in equity investing. On the other hand, if you do nothing, or even use the downturn to pick up more shares, then you have the temperament necessary for investing in stocks. Take a quick look at your investment statements from a few years ago. What types of investments have you put your money into in the past? When it comes to risk, what you’ve done (or not done) in the past can be a pretty good indication of where you’re at, risk-wise, in the present. For example, if you’ve always had a healthy allocation of bonds and cash in your portfolio, it’s probably an indication of your natural tendency to avoid risk. Those who have been comfortable putting money into small-caps, international stocks, or hedge funds probably have a more aggressive financial temperament. As a followup to this question, youmight want to ask yourself whether your allocation has changed very much over the years. If so, is it because of a bad investment experience (i.e. you lost money and you don’t want to do that again)? Or is it because of changing goals and/ or life circumstances? The former could be indicative of a lower appetite for risk. How long are you typically willing to wait for your investments to regain any lost value? At what point do you push the “sell” button? Every investor wants losing investments to regain value quickly. However, those who can “ride out” losing positions for one to two years usually have a much higher tolerance for risk. These investors are the ones who have the stomach for volatile investments such as small-cap stocks, high-yield corporate bonds and resources/commodities. Those with less patience would probably do best to steer clear. Understanding your emotional risk tolerance: questions to ask yourself How an individual deals with risk is ultimately a question of emotional temperament. Two people who feel differently about risk will approach a given investment opportunity very differently, even if they have relatively similar long-term goals. So what’s your emotional temperament? When it comes to risk, how much can you deal with? Answering that question will likely take a good deal of consideration and a fair bit of honest self-reflection. The following questions will get you started. 30 | www.snowbirds.org
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