Find Out About Risk Tolerance by Reading Financial Education Books
What is your tolerance for financial risk? If you don’t know, or if you don’t know what risk tolerance means, the National Financial Educators Council can help by providing financial education books that bring your money smarts up to speed.
The NFEC states that people have different comfort zones when it comes to taking risks with money. Your personal comfort zone is referred to as your “risk tolerance.” Like it says in an NFEC’s personal finance book, it’s important to choose investments with which you feel comfortable, both emotionally and financially.
The personal financial literacy textbook titled Road to Retirement guides students through a test exercise to assess risk tolerance. This quiz presents a series of situations and asks participants to choose from among three possible reactions to each situation. For example, one situation states, “You invested in a few stocks that decreased in value by 50%. You risked $20,000 and now you only have $10,000. What do you do?” Possible options include a) let it ride and hope it goes back up; b) sell and make investments you think will do better; or c) sell and put the money into a safe investment that offers low return but no risk.
Exploring our risk tolerance is one piece of a good financial education that prepares people to invest. If we know how much risk we’ll be willing to take in advance, that knowledge will effectively guide our decisions. Since financial education in schools is rarely offered, we need to find other ways to learn key money lessons. The NFEC can help.
For a more complete risk tolerance quiz, check out Rutgers money risk quiz. This online test was designed by two reputable personal finance professors, Dr. Ruth Lytton (Virginia Tech) and Dr. John Grable (Kansas State).