Risk Tolerance

  

Categories: Trading, Derivatives

See: Risk Lover. See: Risk Seeking. See: Risk of Ruin.

You're 25. You're a lawyer. (Sorry.) You have a working career now of at lest 50 years. (Sorry.) You're committed to saving $1,000 a month, every month, "forever," no matter what. Because you have decades before you'll need that money in your retirement, you have lots of tolerance for risk, in that you really don't care what happens in the next 3-20 years, with markets swooning and diving and dancing all around. You are happy to just be long the market for a very long time. So maybe your entire portfolio is some index fund of small cap companies which pay no dividend, carry high P/E ratios, and should grow much faster than big, old, established companies. Your tolerance for volatility is big.

Now say hello to the 73-year-old you. You're starting to pull from your IRA. Your legal career has been replaced by a much better looking A.I.-driven robot. And you're...done. So you don't have the same tolerance you did before. In fact you have a fraction of it. You can't handle a down 40% market now, so you shift things around dramatically. Maybe your portfolio is only half equities or less, maybe a third, and those equities are probably old, stodgy dividend payers who don't really get crushed even in very bad markets, because their dividends so heavily cushion the fall. Maybe 1/3 is bonds, and the rest...maybe cash, or just short-term paper. Easy. No sweat. No worries. You'll have been handsomely rewarded financially for having been long the market for so long, likely with millions in savings and a long legal career you can look back on, and whimsically wish that you could have thrown a 100 mph fastball instead.

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