Weekend Reading: When It Comes to Risk, It’s Dangerous to Trust Your Instincts

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

Times of market volatility may cause you to second guess your investment strategy. You might assume the future looks riskier and a change is in order, but that’s not always the case.


Types of risk: Because accurately forecasting risk is impossible, acting on any initial instincts you have can be dangerous. Before making any move, you should first understand the difference between two key terms: Risk tolerance and risk perception. Your risk tolerance is the amount of risk you are “willing to take on for a particular reward.” On the other hand, your risk perception is an “in-the-moment estimation of the riskiness of an action or an event, thus it can be affected by emotion, culture, past performance”, etc.

The risks of risk: Combined together, risk tolerance and risk perception can skew your judgment. One day you might perceive an investment as safe, but the next, you might not. In this instance, your risk tolerance didn’t change, but your assessment of the risk did. If both misalign, emotional turmoil can ensue, but there are ways to find financial peace.

How to cope: Action-oriented coping and emotion-oriented coping are two strategies for handling risk uneasiness. Maybe you need to stick it out, zoom out and re-orient yourself with the bigger picture. Or, maybe a change is necessary. Before you take immediate action, though, you should consider the root cause of your feelings. Recent performance and fear-induced headlines are not reasons to completely shift your course of action.

Look inward: Your level of self-awareness is critical in the long-term success of your investment strategy.