Interestingly enough, risk is a matter of perception. So when people talk about “that’s a risky stock”, it depends on the person. As I talked about in a previous post, financial education is severely lacking. Thus, the traditional way that advisors measure risk may not be appropriate. In fact, it may be off to a catastrophic level.
Consider this last recession. Before 2007, people thought that investing in real estate was perfectly safe. You couldn’t tell people it was risky. So if you had asked the question, “how do you feel about putting 90% of your net worth in real estate?” most people would have been comfortable with it.
Real estate however, is a growth investment. By itself, it doesn’t generate cash flows.
Now if you ask that question, what do you think people will say? “No I’m not comfortable with it”. Even though it is still likely either a good chunk of their equity or debt is tied up in real estate.
Risk must be measured in terms of perception of loss and gain. Likely most people are less risk tolerant than they think (I was more). So, in honor of a new way to measure risk, I have posted a survey on this blog and on our Facebook page. Take the (very short) quiz and I’ll post the answers in a week.
Here is the link: