Your Biggest Investment Risk Is You

Posted on August 4, 2014 at 10:03 AM PDT by

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.

investment risk

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.