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How Do I Measure My Risk Tolerance?

Your risk tolerance should be a measure of how willing you are to absorb losses in your portfolio.

Studies in behavioral science show that investors loathe losses about two and a half times more then they enjoy gains. Everyone can likely relate to this stat.

But, to be a successful investor that achieves long-term equity like returns, one has accept some level of risk inherent in the stock market.

Would you be capable of absorbing a 20% loss in your portfolio, and not be tempted to sell all of your equity holdings? If so, you can likely handle being largely allocated to stocks.

Are you very sensitive to loss, and just do not want to see your portfolio balance drop below where it is today? Then fixed income is probably a better solution for you.

Most investors fall somewhere in between, which means working with your financial advisor to create an asset mix that meets your needs.

Over time, equities have proven time and again to deliver solid long-term returns to investors, it's just the bear markets and corrections along the way that prevent all investors from realizing them (spooked investors often sell stocks before participating in rebounds).

What does it mean to Accept Risk?
What is the “Riskless” (or Risk-Free) Rate of Return?

Keywords: market statistics, risk tolerance, volatility, inherent value,