One of the most fundamental questions when creating an investment plan is assessing how one feels about risk, or to put it more specifically, how does one feel about losing money. If you feel the need to check your investment portfolio every hour or so fearing an incipient crash, well you might not do well with a 100% stock portfolio. Similarly if you are a buy and hold (and forget) type, and you understand the value of long-term investing and bought more stock in 2008 when the stock market convulsed, well, you would seem to have the disposition to own mostly stocks (rather than the less volatile, lower return bonds).

The problem with risk tolerance for young investors is...you just don't know. Until you experience a market downturn or correction (20% drop in prices), you really have no idea how you will react. You can complete risk tolerance surveys but those are just your best guess on how you will react and we are usually not very good at predicting our future reactions to events. That's why I found this WSJ article (subscription) from professor Meir Statman (and NGPF podcast guest) such a great read. 

Instead of the typical survey questions (e.g., how would you react to market decline?), he suggests investors should be asking the following questions (and offers insights on how the answers to these questions tell a lot about investors):

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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