What's your comfort level with taking financial risk?

If you're puzzled in how to honestly respond, you're not alone.  Most people find out their true comfort level with risk only after the fact--that is, after they've lost money.  Then, and only then, do we really know how much we can financially and emotionally afford to lose.

Tolerance for risk is difficult to accurately gauge because taking risks (at least in the United States) is a socially desirable trait.  America was founded by brave individuals who risked their very lives, venturing into an unknown land for greater freedom and opportunity.  Ever since our country's founding, entrepreneurial behavior has been highly regarded and amply rewarded. Largely because of this, people like to believe they're greater risk takers than they truly are.

The truth is that most of us would rather not take a financial risk.  In the research I've conducted, I found that only two out of nine investor groups are inherently comfortable in taking financial risks.  The other seven had to be educated about risk, and could only become comfortable after extensive experience.

When trying to figure out  how much risk you can comfortably tolerate,  keep in mind that you may be swayed by what you'd like to believe.   Ask yourself how much money you can financially afford to lose.  Then ask an equally important question:  How much money can you emotionally afford to lose? How would you weather potential financial and emotional loss?

Another complicating factor is that risk is a multi-dimensional trait.  It's influenced by your level of confidence in making financial decisions; by how much emotion you feel in dealing with your money; by what you do with those emotions; and by how deliberative you are versus a tendency to make decisions impulsively.

In addition, people feel differently about taking risks with their money than they do about personal and social risks.  For example, one person may seek risk in his or her athletic life--hang gliding, helicopter skiing, mountain climbing--yet keep all money in a simple savings account.  The reason for this is we have different emotions about risking our money, and these emotions can prevent us from putting our money on the line.

So what's beneficial?  Should you aspire to be a low, medium or high risk- taker?  Actually, there's no right answer, no "one-size- fits-all" approach to taking financial risks.

There are, however, some guidelines that may help you determine what's appropriate for you in taking risks to achieve your goals:

• Impulsive risk taking usually does not pay off.  Take plenty of time to review your chances of success before acting.

• Don't risk more money than your can financially or emotionally afford to lose.  Feelings of remorse can be an emotionally barrier to future success.

• Look at what you may gain from the risk as well as what you may lose.

• Experimenting with risk is usually more costly with age, so educate yourself as soon as possible.

Your risk tolerance is your ability to trade the known for the unknown, and to be comfortable with decisions once they are made.  The best way to increase your comfort level with risk is to take small but consistent steps.   Think of those small steps as  a central part of your financial education.  They will serve you well.