Are you taking too much risk with your investments? Or not nearly enough?
You hear a lot about risk tolerance. But I think it’s far more important to be able to calibrate your risk. To understand whether you need to be more aggressive or less aggressive to get the best returns over time.
There’s a sweet spot that you’re trying to hit, so it pays to know whether you’re unlikely to take enough risk or likely to take way too much.
If you’re generally careful and risk averse, you might be tempted to hold a lot of cash and put all your investments in super safe stuff like bonds and Guaranteed Investment Certificates.
But that’s a surefire way to get lower returns over time. Things will steadily grow, but not as quickly as they could have had you been more aggressive and taken on more risk.
The flipside is someone who likes to gamble and take risks, and is drawn to things like crypto and day trading.
This can work out okay during a bull market, but in the long run, all that risk ends up backfiring, and once again you end up with worse returns than you could’ve gotten had you been more careful and diversified.
Risk is a double-edged sword. You don’t want too much or too little.
It’s about finding that Goldilocks amount that’s just right.