In his book – A Random Walk Down Wall Street, Burton Malkiel discusses the investor’s risk tolerance using what calls the ‘sleeping point’. Here’s an excerpt from the book:
Determining clear goals is a part of the investment process that too many people skip, with disastrous results. You must decide at the outset what degree of risk you are willing to assume and what kinds of investments are most suitable to your tax bracket.
The securities markets are like a large restaurant with a variety of menu choices suitable for different tastes and needs. Just as there is no one food that is best for everyone, so there is no one investment that is best for all investors.
We would all like to double our capital overnight, but how many of us can afford to see half our capital disintegrate just as quickly? J. P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to the sleeping point.” He wasn’t kidding.
Every investor must decide the trade-off he or she is willing to make between eating well and sleeping well. The decision is up to you. High investment rewards can be achieved only at the cost of substantial risk-taking. That has been one of the fundamental lessons of this book. So what’s your sleeping point?
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