You make some excellent points. I think many of us misjudge risk because we fail to look at it holistically. The first things that come to mind, of course, are performance and potential market fluctuations. Most of us have qualms about investments that could lead to significant loss of principal. So to avoid "risk," we park assts in something "safe" paying 1% interest.
But what about the risk of inflation?
The rate of inflation can decrease the value of your portfolio, too. The "safest" investment may conversely carry the greatest risk of eroding the value of your investment. It's another factor to consider when considering risk and your personal risk tolerance.
Re: How do you find out your risk tolerance?
TelecomFreq
4/11/2011 8:35:45 AM
Phoenix,
I had pretty much the same reaction as you. I think this article has a great breakdown of risk. Every person has a different comfort level for risk taking. and i think the author makes a very good point, that just because someone might be a risk taker in other areas of their life they might not be so comfortable with risk taking when it comes to investing.
Like anything else in life, you can mitigate some of the risk by doing your home work and making an informed choice.
Re: Risky or not?
tokyogai
4/11/2011 4:10:49 AM
Well we know the ratings agencies are not the answer. They do not seem capable of actually assessing risk. We need better forums and ways of know what is actually occurring. regulation may help, but firums like this will play a bigger role in the future.
Re: Risky or not?
Phoenix
4/11/2011 3:26:26 AM
I agree with you. We do take a lot of risks without actually knowing that we are doing it. We need to do our homework. But how? I think sites like this enable us to gather a lot of information and of course the standard information sources about money markets and other investment options are there. But how do you really do a risk analysis? If we do intend to change our behaviour we need this information and knowhow to proceed.
Risky or not?
tokyogai
4/11/2011 3:13:12 AM
While only two out of 10 of us are comfortable with risk, I feel many of us take risks that we are not even aware of. Today's markets where yields are very low push people into taking risks they really don't want. How many savvy investors really put money in an insured CD at 1% interest? The money market accounts or even AAA rated bonds pay a lot more and are also considered safe. The real problem comes up when we invest in things that are safe only to find out that they are not. What could be safer than a bond back by home mortagese or even the homes associated with the mortgages? Well we found out that this was actually a very risky investment.
We need more transparency and ways to assess the real risk if we want to change our behaviors.
How do you find out your risk tolerance?
Phoenix
4/11/2011 3:03:38 AM
This is a very interesting article, an eye opener. It gives a lot to think about in terms of risk and its relationship to us with our own unique characteristics as individuals. Most people do go with the flow and I have seen many who have lost a great deal of money investing in so called hot investments without actually doing the homework. However, I think we should take risks. If not you cannot be a good investor. But as every one of us have unique comfort levels in tolerating losses what do you think are the key criteria we can use to gauge our actual comfort levels?
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