Manisha Thakor: Determine Your Need for Risk – Wall Street Journal – WSJ.com

I think “risk” is the most widely misunderstood investment concept. The consequences can be dire – running out of money before you run out of time. My favorite framework for thinking about risk comes from Larry Swedroe, Director of Research for The BAM Alliance. Larry looks at risk in three ways: your willingness, your ability, and your need to take risk.Risk is often defined as the odds of losing money or the chance of getting a return different from that which you expect. Against this backdrop many folks – understandably – focus on their willingness to endure “risk.” This is often referred to as your “sleep well at night” factor. Others will focus on their ability to take risk. These investors will ask themselves if, given their age, income or profession, they have enough time, future earnings or job stability to stomach risk.

via Manisha Thakor: Determine Your Need for Risk – Wall Street Journal – WSJ.com.