PSF Chat

[Darrin]

Sixty nine.

[MasterXtreme]

Code 12: Bump up topics to make the forum more general. 

[Darrin]

All XD related content has been blocked from guest viewing.

[MasterXtreme]

Code 12, XD content gone.  Repeat, XD Content gone.

[Darrin]

We will wait for the all clear.

[MasterXtreme]

And back to stock talk.

[MasterXtreme]

PSF

PERSONAL STOCK FORUM.

Today's topic... RISK TOLERANCE.

Risk tolerance is a psychological trait that is genetically based, but positively influenced by education, income, and wealth (as these increase, risk tolerance appears to increase slightly) and negatively by age (as one gets older, risk tolerance decreases). Your risk tolerance is how you feel about risk and the degree of anxiety you feel when risk is present. In psychological terms, risk tolerance is defined as “the extent to which a person chooses to risk experiencing a less favorable outcome in the pursuit of a more favorable outcome.” In other words, would you risk $100 to win $1,000? Or $1,000 to win $1,000? All humans vary in their risk tolerance, and there is no “right” balance.

Risk tolerance is also affected by one’s perception of the risk. For example, flying in an airplane or riding in a car would have been perceived as very risky in the early 1900s, but less so today as flight and automobile travel are common occurrences. Conversely, most people today would feel that riding a horse might be dangerous with a good chance of falling or being bucked off because few people are around horses.

The idea of perception is important, especially in investing. As you gain more knowledge about investments – for example, how stocks are bought and sold, how much volatility (price change) is usually present, and the difficulty or ease of liquidating an investment – you are likely to consider stock investments to have less risk than you thought before making your first purchase. As a consequence, your anxiety when investing is less intense, even though your risk tolerance remains unchanged because your perception of the risk has evolved.

By understanding your risk tolerance, you can avoid those investments which are likely to make you anxious. Generally speaking, you should never own an asset which keeps you from sleeping in the night. Anxiety stimulates fear which triggers emotional responses (rather than logical responses) to the stressor. During periods of financial uncertainty, the investor who can retain a cool head and follows an analytical decision process invariably comes out ahead.

Any questions?

[Darrin]

No questions at all.  I think it makes sense.  This tolerance varies depending on the stock.  You have to make the determination of that risk.

[MasterXtreme]

Yes, you got it.  You have to set the value to the stock you want and determine if the trade is worth the risk.  That is what we call the risk tolerance. 

[Darrin]

Hmm, hmm, yes.  Very interesting, very interesting indeed.  So I could buy stock for say, Mitsubishi and that would mean...

[MasterXtreme]

That would be an example of high risk for right now.  They are seeing a dwindling American market and in Japan facing an MPG lie.  But their stock could go up some when they release their new SUV.  Buy when low, but only if you think you can bring back money later from the deal. 

[Darrin]

Oh, I see.  That makes perfect sense.  I am sure glad the Personal Stock Forum is here.  So helpful. 

[MasterXtreme]

That is why I am here, to help.

[Anyponedrawn]

Should I indulge in American stocks?

[MasterXtreme]

It depends what your risk tolerance is.  Certainly several companies would be great to invest in right now as values increase.  You will make a lot of money.