Investing - Risk Tolerance Vs Risk Perception

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Sometimes an investor enters in the stock market believing that his risk tolerance level is very high and thus ready to bear the volatility. The same investor starts blaming the government, economy, inflation or may start calling equity investments as gambling in the market downturn. Why so? because he's misjudged his risk tolerance level. He enters with a perception in mind that he's young or having a good inflow of money or having very long term goals etc. so he should be very high in equity allocation. But after few months he found that he could not handle the real volatility. So what actually has changed in these months is his risk perception.

 

Risk Perception is what you as an investor personally feels about your risk tolerance level. Buying more when markets are moving up and selling more when markets are going down is the result of your personal risk perception. Research has shown that bull and bear market phases hardly change the risk tolerance level of investor, but what changes in the risk perception. Clients who are not following a proper process in their investments often fall prey to their wrong decision making due to their own risk perception.

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