Financial planning these days – at least as practised in some quarters – can be a peculiar business. You offer up a few details about yourself – such as age, number of dependents, earning capacity and your 'appetite' for risk – and a computer will spit out a list of monthly payments for you to make for various investments and insurances.
You can then proceed with your life and, so long as you keep making the payments and the markets continue to provide their historical returns for your risk-determined investment style, you can look forward to a happy retirement, safe in the knowledge that your funds won't run out (so long as you don't outstay your welcome on this earth by too much of course).
If this all seems a bit naïve, then that's because it is. It may enable financial planners to churn out plans by the dozen, but none of them will deal with risk in any meaningful way.
Investment risk tolerance
If you really want to gauge your appetite for risk, you need to do it in the midst of a nasty, grinding bear market with a large chunk of your life savings apparently ebbing relentlessly away. Continuing to hold and even buy shares that have already fallen 30–40%, without any idea of where the bottom might lie, is very different to simply ticking a box marked 'strongly agree' alongside the statement 'I want to maximise my returns and can tolerate short-term fluctuations in the value of my investments'.
If you're having trouble sleeping, try reading the Australian Risk Management Standard (AS/NZS 4360). In it you'll find that one of the first steps, after identifying the stakeholders, is to identify all of the risks. This is actually impossible, but leaving aside this minor inconvenience, you can move on to the risk management options of avoiding, accepting, transferring, or 'treating' the identified risks.
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