Decide how much risk you can really afford

On Money

April 21, 1996|By Susan Bondy | Susan Bondy,Creators Syndicate

How much risk can you take before you start losing sleep or find yourself in financial hot water? Your financial risk tolerance is your ability to sustain losses without jeopardizing your current lifestyle or future security.

Of course, risk isn't necessarily bad. With successful investments, the higher the risk and the higher the leverage, the higher the potential reward. But risk can really hurt when you get in too deep. And, in these tumultuous times, knowing how much is too much is very important.

To find out what is appropriate for you, or how much of your assets to put at risk, answer the following questions:

1. If I lose a portion of the money I've invested, could I make up that loss? How long would it take me to make it up?

The answer depends on what you earn, what you need to live the way you want, and what you are able to save. If you can save $5,000 a year and you happen to lose $5,000 of your investments, you can make up that loss in one year.

2. What is my future earning power?

In addition to what you are currently earning and what you can sock away, also consider whether you expect your earnings to increase and for how long.

A couple in their 20s, both of whom are working, can usually afford to take substantially more financial risk than a couple in their 60s planning retirement. But the young couple should also consider what would happen to their income if they decided to have children. If one spouse decided to leave the labor force, which would reduce family income at a time when household expenses as well as the need for security are rising, financial-risk tolerance would be substantially reduced.

3. If I lose the money I've invested (or any portion of it), will my current lifestyle change? Or, to put it another way, do I depend on investments to provide or supplement my income? If so, to what extent?

The more you depend on investments to support your current lifestyle, the more that lifestyle will be affected if you lose a portion of those assets. You are therefore more sensitive to financial risk.

If your expenses are higher than your income (the government calls this a deficit), and you depend on your investments to make up the difference, you have a low financial risk tolerance.

4. For what is the money earmarked?

Your money may be earmarked for education, a down payment on a house, a "rainy day" fund or retirement. In fact, your money may have a number of purposes, some short-term and some long-term. Short-term money should be kept safe, in low-risk investments. Long-term money may be exposed to higher risks.

High-risk money should only be that amount that you can afford to lose without changing your lifestyle or jeopardizing your future security.

Keep in mind that knowing your maximum limit for risk in no way implies that you should take that maximum risk. Risk itself is not bad thing, but excessive risk can hurt.

Susan Bondy welcomes readers' questions, but the volume of mail prevents her from answering each letter personally. Write to Ms. Bondy in care of this newspaper or at 74774,3652compuserve.com. All letters will be treated confidentially.

Pub Date: 4/21/96

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