With all the market volatility we have been experiencing, I was reviewing some of my old columns to see what I had said about it before. Here are a few excerpts of a column I wrote in April 2001, in the middle of the last major stock market decline.

“Bob Mullikin, a retired PG&E executive, reminded a Rotary Club audience that if you analyze the Chinese symbol for the word ‘crisis’ it is the combination of the symbols for ‘danger’ and ‘opportunity.’

If we apply this concept to investing, it seems an incredibly appropriate description. Many investors can relate to the crisis part of this observation when they consider the fall in stock prices and the value of their accounts. It has been a dangerous market. Optimists, however, would certainly agree that there is exceptional opportunity with these low prices.

It is all about risk. Risk means many things to many people. One definition of risk is the exposure to the chance of injury or loss. With stock market risk, the injury can be to our pocketbook by the loss in value.

Risk is a relative to the risk taker. One person’s risk is another’s opportunity.

Another way to look at investment risk is its unpredictability. Again, by nature, risk is uncertain. If it were easy to predict, then it wouldn’t be risky. It would be something else.

In the past year, many investors gained a greater insight into their personal ability to take risk. Professionals call this their ‘risk tolerance’ — their ability to tolerate the risk of loss. Everyone is different when it comes to evaluating his or her risk tolerance. Assessing one’s risk tolerance is like assessing their capacity for courage. You don’t know if you have it until it is tested. Courage is tested by extreme events like military combat, natural disasters or health challenges. Investment risk tolerance is tested by market volatility.

There are many subsets of investment risk. However, the loss of value of an investment because of market conditions is the predominant risk that most investors fear.

Investors with longer time horizons can accept more risk. If you do not need to call on the investment for years, you can ride through these turbulent times. Therefore, assessing your time frame is essential to measuring your risk tolerance.

Most investors have different risk tolerance for different accounts. Retirement plans like IRAs, and 401K plans may have a longer time frame than an emergency savings account. The latter needs to be ready at a moment’s notice, while the other may not be needed for many years.

Also, allocating investments to multiple risk classes reduces risk. If you take just three assets groups — stocks, bonds and savings and you balance your investments between them, you have a basic risk management strategy.

There is no exact formula for setting the allocation percentages, but one formula that some use is to take the number 110 and subtract your age. This number would represent the percentage you should have in stocks. The remaining percentage would be divided between bonds and cash. Obviously, a 30 year-old would have 80 percent in stocks while a 70 year-old would have only 40 percent.

Why would a 70-year-old have stocks? Offsetting the ferocity of inflation and taxes is the best reason.

I hope the stock market of the last 14 months has not so tested your risk tolerance that you have pulled completely out of the market. It may have made you more conservative, and that’s fine. There are few places that offer the long-term performance of the stock market but a phrase of caution: To thine own risk tolerance be true.”

Nearly everything I wrote in 2001 would apply to today’s market volatility and will apply ten or twenty years from now.

Notable Quote: “The man who knows it can’t be done counts the risk, not the reward.” Elbert Hubbard

Tom Mills is a Registered Investment Advisor and Certified Financial Planner®. You may call or write him at 1030 Seminary St. Suite D, Napa CA 94559, 254-0155, fax 254-0158 or e-mail suntrm@aol.com