Posted by Maneesh Sethi :: October 4, 2007 @ 10:44 am

In any investment decision, it is important to understand your risk tolerance. Each time you create a P2P loan portfolio on Lending Club, there is an opportunity to indicate your risk sensitivity on a scale of 1-5. Choosing your risk level determines which types of loans will be put into your portfolio. So it is often helpful to look at the various ways that people assess their comfort with risk.

For example, Tim Ferriss, an amazing blogger and writer, wrote a great paragraph about his coming to terms about the risks of losing all of his money in his book, Four Hour Work Week. I'm going to quote from his book.

"Suddenly, I started thinking of simple steps I could take to salvage my remaining resources and get back on track if all hell struck at once. I could always take a temporary bartending job to pay the rent if I had to...I realized that on a scale of 1-10, 1 being nothing and 10 being permanently life-changing, my so-called worst-case scenario would have a temporary impact of 3 or 4...On the other hand, if I realized my best-case scenario, or even a probable-case scenario, it would easily have a permanent 9 or 10 positive life-changing effect."

Tim Ferriss put it best---often, the worst that can happen is minor compared to what will probably happen. This is good advice for you when choosing your risk tolerance. What's the worst that can happen? If it's not that bad, and if it's very unlikely, consider moving towards a more risky portfolio. If the opposite is true, be conservative.

What's the worst that could happen?