When it comes to investing, there’s no one-size-fits-all solution. I’ve heard it said that “investing is like an amusement park – you choose which ride you go on.” Another wise saying goes, “The best investment is the one that doesn’t cause you to lose any sleep.” At first glance, these quotes might seem vague or unhelpful, especially if you’re new to investing.
But the truth is, personal finance is just that – personal. What works for me might not work for you, and vice versa. The best investment for you will depend on your individual values, risk tolerance, and goals.
Risk tolerance is a trait, not a quiz score
The friend in this post did not misjudge real estate. He accurately judged himself. Risk tolerance is mostly a personality trait, which means it is stable, hard to change, and poorly measured by questionnaires. A quiz taken on a calm Tuesday will tell you that you are an aggressive investor. A 30% drawdown will tell you the truth, and the quiz and the truth rarely agree.
This is why the “lose any sleep” test from the intro is better than it sounds. It is not asking how brave you feel. It is asking whether you can hold your strategy when the news is bad, because holding is the only part of investing that actually works. The investor who panics out of an S&P 500 fund in a crash and the investor who never buys one at all get roughly the same result: no compounding. Knowing yourself is not soft advice. It is the mechanism that keeps you invested long enough for the math to work.
One more distinction worth making: volatility is not the same as permanent loss. A stock fund that drops 30% and recovers was volatile. Money in a failed business or a scam is gone. The friend sleeping well in real estate is accepting a different bundle of risks (concentration, illiquidity, leverage) in exchange for avoiding the one risk that bothers him most, which is watching prices move every day. That is a legitimate trade. Pretending it is not a trade is where people get hurt.
I recently had a conversation with a friend that drove this point home. We were discussing our investment strategies, and I mentioned that most of my money is invested in an S&P 500 index fund. My friend’s response was immediate: “Whoa, that’s dangerous!” He was concerned about the volatility of the stock market, and I couldn’t blame him.
But then I asked him where he kept most of his money, and he told me it was in real estate. My response was similar to his: “Whoa, that’s dangerous!” To me, investing in real estate seemed riskier than betting on the top 500 biggest US companies.
Our conversation highlighted an important point: what seems safe or risky to one person might not be the same for another. My friend sleeps well at night knowing his money is invested in real estate, while I sleep well knowing mine is in the stock market.
So, if you’re considering where to put your money, take some time to reflect on what will truly make you feel secure. Don’t just follow someone else’s advice or invest in something that makes you nervous. Instead, ask yourself: where can I put my money that won’t cause me to lose any sleep?
By taking a personal approach to investing, you’ll be more likely to find a strategy that works for you in the long run. Remember, it’s not about finding the “best” investment – it’s about finding the one that’s best for you.
This article is part of the Winchell House Original Articles series.
Three questions before you copy anyone’s strategy
The anecdote’s real lesson is that nobody else’s answer transfers to you. Before adopting any strategy, yours included, run it through three questions.
First, what is the money for and when do you need it? Money you need in two years should not be in anything that can drop 30%. Money you need in twenty years probably should be. Time horizon does more work in this decision than temperament does.
Second, what would you actually do in a crash? Not what you hope you would do. Look at what you did the last time markets fell hard, in 2020 or 2022. If you sold, bought more, or did nothing, that is your real risk tolerance, and your strategy should be built around it rather than around the person you wish you were.
Third, does this strategy have a job you can explain in one sentence? “My index fund grows my retirement savings” is a job. “My friend’s cousin made money on this coin” is not. If you cannot say what an investment is for, you will not hold it when holding gets hard, and the whole personal-finance-is-personal framework collapses the first time it is tested.
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