Money Sundays: A Few Brief Thoughts on Risk Tolerance

"Risk tolerance" is one of those financial euphemisms many people toss around without fully understanding. In almost every instance, people actually do not know their risk tolerance until it's too late.

Here's what's more typical: an investor thinks he knows his risk tolerance, and then has his investments cut in half during a 2008/2009-type stock market correction. Then and only then, he realizes that his risk tolerance was way, way lower than he thought it was. This is a classic setup for an overconfident investor who gets blasted out of stocks at market bottoms.

I don't care who you are: your risk tolerance is lower than you think it is. The time to realize this, however, is before a market correction.

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