In gauging risk, take emotions into account

Boost comfort by taking small, consistent steps

Dollars & Sense

March 24, 2002|By Kaitlin Gurney | Kaitlin Gurney,KNIGHT RIDDER/TRIBUNE

What's your comfort level with taking financial risk?

If you're puzzled about how to honestly respond, you're not alone. Most people find out their comfort level with risk only after the fact - that is, after they've lost money. Then, and only then, do they know how much they can financially and emotionally afford to lose.

Tolerance for risk is difficult to accurately gauge because taking risks (at least in the United States) is a socially desirable trait. Ever since our country's founding, entrepreneurial behavior has been highly regarded and amply rewarded. Largely because of this, people like to believe they're greater risk-takers than they are.

When trying to figure out how much risk you can comfortably tolerate, keep in mind that you may be swayed by what you'd like to believe. Ask yourself how much money you can afford to lose financially. Then ask an equally important question: How much money can you afford to lose emotionally?

A complication is that risk is a multidimensional trait. It's influenced by your confidence in making financial decisions, by how much emotion you feel in dealing with your money, by what you do with those emotions and by how deliberative or impulsive you are.

In addition, people feel differently about taking risks with their money than they do about personal and social risks.

There's no one-size-fits-all approach to taking financial risks. There are, however, guidelines that might help you determine what's appropriate for you in taking risks to achieve your goals

Impulsive risk-taking usually does not pay off. Take plenty of time to review your chances of success before acting. Don't risk more money than you can financially or emotionally afford to lose. Feelings of remorse can be an emotional barrier to success. Look at what you might gain or lose.

Your risk tolerance is your ability to trade the known for the unknown and to be comfortable with decisions. The best way to increase your comfort level with risk is to take small but consistent steps. Think of those small steps as a central part of your financial education. They will serve you well.

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