To say that the markets of the past 2 months have been rough would be an understatement. In fact it is so much of an “understatement” that I have mentioned it as such for 2 net worth updates in a row, and probably will continue to do so for the upcoming months to come!
I know personally my net worth is down tens of thousands of dollars based solely on the winds of the market. I am very correlated to the market and it has recently made me think about the old saying from Mike Tyson:
What is your REAL Risk Tolerance?
Investopedia has a pretty good definition of risk tolerance,
Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.
Knowing what you think your risk tolerance is extremely important. I was brand new to the wealth management business when 2007 hit and I was simply shocked how many people made no connection between their age, goals and risk tolerance when maintaining their portfolio. There are numerous tools out there that may help you determine what you think your risk tolerance. A great example would be the one from Vanguard.
Risk Tolerance Has to Do with More than Marketable Securities
Risk tolerance goes beyond just marketable securities. For example, prior to starting any business from appliance removal in Denver to a law firm to an international manufacturing firm, the entrepreneur needs to take a hard look at their own risk tolerance. Is he or she comfortable with taking on debt to grow? Should they be? Is a partner needed? What is the plan if there is a market downturn for the goods or services you are offering?
Now, What is someone’s REAL risk Tolerance?
It is only after being punched in the face can someone really attest to knowing their risk tolerance.
I have said in the past (both here and offline) that I think I have a lower than average risk tolerance, however, I have been selling naked selling naked puts for years! This is one of the most risky types of investing out there, but this is also the first time since doing so that I have encountered a 60 day down turn and it has me really thinking about what is my plan now that I have been punched in the face.
I think I am going to really assess the situation in my end of year review, but I have already started to change how I sell naked puts.
Have you ever thought about your Risk Tolerance?