Do You Feel Lucky, Punk? Determining Appropriate Portfolio Risk

Some people are comfortable with risk. Others are conservative by nature. Some people avoid the stock market because they don’t understand it and consider it gambling.

I’ve never been afraid to take risk with my portfolio. I don’t take uncompensated or unnecessary risk, but I am willing to roll with the ups and downs of the stock market with a portfolio that is roughly 90% stocks.

How Risky Should I Be With My Portfolio?

The more investors learn about investing, the more they realize it’s all about risk management—and the risks you face matter far more than the past or projected returns of the investment.

RISK VERSUS REWARD

The amount of risk you take should be directly related to your need and ability to take risk. Most investors have a significant need to take on risk, but there are some who do not.

Risk Tolerance

If you don’t have the emotional and financial ability to withstand a 50 percent drop in your assets (and few do), a 100 percent stock portfolio probably isn’t for you because once every 30 to 50 years or so, the assets of stock investors take a 50 percent haircut.

Save More Money

One of the best ways to lower the amount of risk you need to take is to save more money. Saving more of your income now has a double positive effect on your portfolio.

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