Review some facts
For a riskier asset, the 10-year average standard deviation of the SPDR S&P 500 ETF (ticker: SPY) is 12.69. A higher standard deviation means that there’s a likelihood that returns will deviate from the mean, both up and down.
Riskier assets, like stocks, have more dispersed returns and typically a higher standard deviation. For example, since 2008, the S&P 500’s greatest loss was in 2008, with a decline of 36.55%. While in 2013, the S&P 500 gained a 10-year record of 32.15%.
Understanding risk tolerance is an active process that incorporates personal, economic and market factors. It’s important to understand one’s time horizon, risk tolerance and risk capacity before constructing an investment portfolio. A comprehensive understanding of investment risk will minimize the likelihood of buying high and selling low.
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