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I remember when I managed 401k plans and conducted educational programs for employees trying to discuss risk tolerance. I concluded over the years few people actually understood their own risk tolerance, including me. It was easy to claim being willing to take risk when things were going well, but that confidence quickly disappeared if their account dropped three days in a row.
To help, we built, with “expert” help, three funds – a mix of the mutual funds and Guaranteed Investment Certificate or Contract (GIC) offered by the plan. They were labeled Conservative, Moderate and Aggressive. The Aggressive fund had no GIC and the Conservative fund a good portion GIC. All three automatically rebalanced.
We put a great deal of effort in explaining it all and what it was intended to accomplish. A great deal of wasted effort. They were either not used or misused with many people investing in more than one fund, sometimes all three. I think workers were overconfident with their ability to tolerate risk.
The University of Missouri has a good online and free risk tolerance test. You factor in age, income and decision make based on investment knowledge.
I took it and came out “average/moderate.” I’m not sure exactly what that tells me though. I know I’m not a risk taker, but average. I don’t like being average. I wonder what the results would be if I were 35 instead of 81.
When it comes to money, money needed to live on in the future, I think most of us have a lower risk tolerance than what we may tell ourselves.
Once a year my wife and I go to a casino for a couple of hours with the slots. We have a fixed amount of money we keep separate – about $200 – if we win, we add it to the pot. Over several years the pot hasn’t been depleted, but barely grown either. We limit our risk and since we play only nickel machines, we limit potential reward as well. I recall the thrill of a win on one of those slots with lots of action, sounds and such. And then, inevitably, the odds catch up to us and we slink away after hitting our risk limit.
Betting on ones financial security is a lot different and trying to meet goals of growth and safety is not an easy task. In some cases extreme risk tolerance in either direction may make the goal more difficult.
I’m thinking moving between aggressive, moderate and conservative style portfolios consisted with age or the years to retirement is what most people are thinking.
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