Thank goodness for the stock market's frightening fall on April 14th. Don't get me wrong. No one wants more than one trillion dollars in stock market value to vaporize in a day. And everyone was relieved when stocks returned from the abyss. Yet the crazy swings in the market are a timely warning for all investors. Now is a good time to review your ability to absorb investment risk. Stocks are risky--it's in the nature of the beast. Risk is a rich word with many shades of meaning. It hints at dangers to be avoided, such as smoking or dashing across an eight-lane highway. But the word also prompts stirring images of entrepreneurs starting their own companies, immigrants moving to the U.S., and snow boarders surfing the ski slopes with abandon. Risk means different things to different people--and that variation should show up in investment portfolios. One way to address the question is to take a risk tolerance test offered by most mutual fund companies. Although there is nothing wrong with these quizzes, I am not a big fan of them. The results are bland and not especially informative. Far more illuminating is studying your reaction to the recent sickening sell off in the Dow and the NASDAQ, and the market's subsequent turbulence. How troubled were you? What did you do? You should also think about your approach to risk in other aspects of your life. For instance, did you seize the opportunity to leave a good job at a stable company for a smaller, more entrepreneurial outfit? Or did you decide the switch was too risky? The answers to questions like these should enlighten the construction of your portfolio.

In most cases, equities should form the core of any durable investment strategy. But whether equities make up a sliver or almost all your long-term investment portfolio ultimately depends on your comfort level with financial market risk. As Paul Samuelson, the Nobel laureate in economics remarked to me several years ago during an interview, "you have to always sell down to the sleeping point." He's right.


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