Your True Risk Tolerance

The following is a public service announcement:

This morning it appeared as if we were headed for a third consecutive day of the Dow declining 500 points, something which has never happened before. Sure 500 points ain’t what it used to be, but at 9:30 this morning, the Dow had declined more than 9% since Thursday’s close.

If you’re an average investor- and by average I mean you’re at home reading this and your name is not Jim Simons- and you sold your stocks today, you overestimated your appetite for risk. After nine consecutive years of positive returns, it’s likely that a lot of people’s asset allocation was out of whack with their true risk tolerance. Hopefully these people learned a valuable lesson and didn’t lose too much money in the process.

If investing was just about maximizing returns, we’d all be invested in a 100% stock portfolio. But not everybody has the ability to stomach a three-day 9% decline without panicking, and for this reason, investing is about maximizing returns that you can reasonably expect to achieve, given your ability to handle risk.

If you were nervous this morning, congratulations, you’re a human being. But if you weren’t nervous, kudos, you’ve earned the right to take a little more risk.