Go to any financial planner, brokerage website or 401(k) survey, and there’s a good chance that asset allocation based on risk tolerance will be the first question you’re asked.
It’s a hallmark of the financial planning process. Figuring out how you will react to or feel about various market scenarios allows planners to adjust a portfolio of stocks, bonds and cash accordingly. It’s Financial Planning 101.
The problem is, many investors aren’t being truthful with themselves when it comes to filling out the survey to determine an appropriate risk tolerance. Sure, you may think your risk tolerance is “aggressive” or “moderate,” but behavioral data shows that many investors overestimate how much they are willing to lose. And that leads to poor investment decisions. For investors, figuring out what your risk tolerance really is, is key.
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