Many commentators tell us that we each have a certain level of tolerance for investing risk and that we should make choices that work for us. As long as we are all true to our feelings about risk, we can all be right, even if we make different choices. This is bunk.
Betting next week’s grocery money on a horse is dumb whether you have a risk-taking personality or not. Buying stocks with the house down payment that you’ll need in 6 months doesn’t make sense even if you’re comfortable with it.
The appropriate way to invest money depends mainly on when you’ll need it and for what purpose. How much of a risk-taker you are may determine what choice you make, but it shouldn’t. The larger the sum of money, the more important it is to be driven by rationality rather than feelings.
The examples involving crazy risks are easy to agree with, but the mistakes of being too conservative can be harder to accept. Investing retirement money you won’t need for many years in bonds just doesn’t make sense even if you’re a nervous investor.
Keeping emergency savings in cash in case of job loss or other financial emergency makes sense. Safe investments for money that you will need in the next few years make sense. Even designating a small slice of retirement savings to be in bonds in case of a huge financial emergency may be sensible.
But, once these things are taken care of, it is appropriate to invest long-term savings in riskier investments that have higher expected rewards. I would prefer to see people try to overcome irrational fears before giving up and accepting a future with very modest savings.