Financial Mastery for the Career Teacher by Siciliano Gene;

Author:Siciliano, Gene;
Language: eng
Format: epub
ISBN: 1993280
Publisher: Corwin Press
Published: 2010-04-23T00:00:00+00:00

How Much Pain Will You Accept Along the Way?

Investing in stocks is perhaps akin to being in a competitive, noncontact sport, such as golf or chess. You can spend as much time as you want studying, planning, practicing, and analyzing to make good decisions, and the more of that you do, the higher the likelihood your performance will be better. Yet you can still be in the game with only a fraction of that work—you just accept a greater possibility that your results will be less than they would otherwise be. Happily, the choice is up to you, as long as this isn’t the way you intend to make your living and you don’t gamble with the rent money.

Discuss your investment strategy with a professional investor or investment adviser, and he or she will likely ask you early, “What is your level of risk tolerance?” The question is one you must ask yourself before you begin a serious investment program of any kind, but it is particularly relevant in more volatile forms of investment, like the stock market. You must determine how much potential for loss is acceptable for you—not comfortable, for no loss is comfortable for most of us, but acceptable—in the search for profit. How to do that is different for most of us, but it’s really about the ability to know how you feel when things happen that you didn’t expect.

Here’s a little self-test that might help: Assume you buy a stock, and it goes up 20% after you buy it, and then it goes down 10%, cutting your profit in half, more or less. If you then think that this is normal behavior—the ups and downs of the market—and you look for it to turn up again, you are within your comfort zone of risk tolerance. If, however, you watch the stock each day and wonder if you should sell to prevent further losses, or you realize you wish you weren’t holding the stock at all and would rather forgo the potential profit on this investment rather than having to worry about additional losses, you have exceeded your acceptable risk tolerance.

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