![]() ![]() Investors may think they understand their risk tolerance-until they don't. It's also important to consider how the two impulses can work together, with yesterday's greed paving the way to today's panic. But there are very few time-tested tools for consistently making those decisions well. It's enticing to try to catch the next big investment wave (up or down) and allocate assets accordingly. Then there's the temptation to try to "time" markets. And most importantly, those higher returns typically are generated through "stick-to-it-iveness," not lucky bets. ![]() Aggressive portfolios' higher historical returns have had a much wider range of returns-that is, a higher standard deviation, with greater "drawdowns," or peak-to-trough declines, and volatility. But there is a dark side to an aggressive posture's potential higher returns: the risk taken in getting there. ![]() First, there's the temptation to load up on aggressive higher-risk assets in the hope of a big payoff. Greed can also lead us astray in a number of ways. As a result, our reaction mechanisms are heightened-but not necessarily to our advantage. Never before has information about the economy and markets been more readily available and disseminated and never before has it been easier (and less expensive) to trade. This is a great way to invert the old adage about buying low and selling high. When it comes to panic, the most obvious example is trying to dump investments when the market is dropping.
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