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Discover Your Tolerance
for Taking Risk with Your Money
What's your comfort level with taking financial risk?
If you're puzzled in how to honestly respond, you're not alone. Most people find out their true comfort with risk only after the fact-after they've lost money. Then, and only then, do they really know how much they can financially and emotionally afford to lose.
There are several reasons that risk is mystifying and elusive:
Tolerance for risk is difficult for most people to accurately gauge because it is a socially desirable trait, at least in the United States. The USA was founded by brave individuals who risked their lives and ventured into an unknown land for a greater sense of freedom and independence. Ever since, entrepreneurial behavior has been revered and rewarded. So, people like to believe that they're higher risk takers than they truly are. They want to believe that they'd step up to the plate.
The truth is that most people would rather not take financial risk. In the research we've conducted, we found that only two out of nine investor groups were inherently comfortable in taking financial risks. The other seven had to be educated about risk and become more comfortable with experience in investing.
When you search your minds and hearts for your own sense of what risk means to you and how much risk you can comfortably tolerate, keep in mind that you, too, may be swayed by what you'd like to believe. Ask yourself how much money you can financially afford to lose. And then ask an equally important question-how much can you emotionally afford to lose? How will you weather the financial and emotional loss?
Another complicating and confusing factor is that risk is not a single dimensional trait; it is multi-dimensional. So it's difficult to isolate and identify. It's influenced by your level of confidence in making financial decisions, how much emotion you feel and what you do with those emotions, how thoughtful you are vs. impulsive and more.
In addition, people feel differently about financial risk-taking risks with their money-then they do about personal or social risk. For example, they may seek out risk in their athletic lives-helicopter skiing, hang gliding, mountain climbing-yet avoid investing and keep their money in a bank savings account. The reason for this difference in behavior is that they have different emotions about risking their money and these emotions prevent them from putting their money on the line.
So what's beneficial? Should you aspire to be a low, medium or high risk-taker? How do successful investors take risks with their money and manage their emotions in the process?
>> next Insight Into Money Management and You
We will answer these questions and provide some guidelines for you to use in evaluating and managing your risk-taking.
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