When should you take risk and how much should you take?

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." Warren Buffett

There are two times in life when you shouldn't take investment risk—when you can't afford to take risk and when you can. 

• When you have a short investment horizon [need to withdraw money soon], and do not have time to recover from a loss.

• When you have achieved your investment goals—don't put your retirement lifestyle at risk.

Take all the risk to you need to take and are able to take and not more. 

• Each investor needs to determine the annual rate of return he needs to take to reach his investment goals [the amount needed to generate income for a desired retirement lifestyle].

• Then the investor needs to determine the level of risk he can live with—before a "temporary" loss may cause him to sell his positions in a down market [investors need to be able to sell when they want to, not when they have to].

• If the amount of risk required is greater than the investor can take, a compromise is needed [adjust retirement date, retirement income and lifestyle, or live with additional risk].

Things that risk averse investors keep in mind:

• The future is unpredictable.

• You must protect against unpredictable adversity.

• In the short run anything can happen. In the very long run, everything will happen.

• While loss avoidance is not an investment strategy, it must be a foundational investment principle.

• Losing money can be devastating to your investment returns.

VIA Note: We have found that most investors are taking more risk than they need to take, and are able take—causing a selling action that results in a loss—ouch!