When you set up an investment portfolio, the most important thing to consider is your risk tolerance.
But what exactly do we mean by risk?
Risk can mean a lot of things to different people.
When investment professionals talk about volatility, these drops are generally what they are talking about.
Assessing Your Risk Tolerance?
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Nonetheless, that same person may have an extremely low tolerance for doing so.
Such a person has a very high risk capacity, but low tolerance.
Conversely, someone with much less wealth may be willing to invest very aggressively.
They might not bat an eye to watch their investment cut in half during a recession.
Your Age Is an Important Factor
Age is a key considerationin evaluating risk capacity, as well.
The simple rule is that if its happened before, it can happen again.
In all likelihood, yes.
This is where having a financial plan comes into play.
Such a plan doesnt have to be complex or expensive.
The next time that happens, ask to see a copy of their track record.
It is surprising how quickly the free advice will dry up.
In short, your brother in-law who says he successfully sidestepped the last market drawdown probably:
1.
We humans have a remarkable tendency to recall our successes, while systematically discounting our failures.
Also keep in mind that these down periods can last for several years.
David Metzger is a fee-only wealth manager in Chicago.
He is a certified financial planner (CFP) and a chartered financial analyst (CFA).