No. of Recommendations: 3
In his book, rational expectations, William Bernstein identifies 3 types of risk.
Risk capacity is how much of a drop in value your portfolio can withstand, and have you still be able to retire.

Risk need is if you how so little money that you need to take more risk to get enough money to retire, and risk tolerance, is how low the market can go without you selling in a panic.

Here are some examples. If Susan has 1,000,000 in assets, and has bonds that pay 3% a year, and she only needs 30,000.00 a year to like on, her risk capacity is 0, her risk need is 0, and her risk tolerance is n/a, because she will be in bonds all her life.

If the same Susan has 1,000,000.00, plus a pension that will cover her all her life, then her risk capacity is 100%, her risk need is zero, and her risk tolerance depends on her personality.

Finally if she has a niece who has a low wage job, and saves 4000.00 a year, her risk tolerance again depends on her personality, her risk her risk need is huge, because she won’t save enough, and her risk capacity is also huge because if her stocks go down, she is screwed.

Most Americans are like her niece.

The way to determine your risk tolerance is by seeing if you sold your assets during the great recession, and even more so, if you bought more stocks, because the prices were low.
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