Investor's Edge

Here's why it's crucial to measure risk in dollars, not percentages

Money manager explains why investors should anticipate losses

Before making an investment, you should always assume you're going to lose money, according to Joe Duran, founder and CEO of United Capital.

And, he said, "You should always be very certain of what is your tolerance for losses are before you invest at all."

Duran says people think they're brave when the market is doing well, but they underestimate how much they hate to lose money. Knowing your risk tolerance level helps investors make unemotional, well-thought purchases.

He also says knowing how much you could lose in dollars terms, not percentages, is crucial. Consider a $1,000 investment. A commitment to sell at a 15 percent correction might not sound or feel the same as a $150 loss. Even though mathematically it's the same, Duran says your tolerance number will be much lower in dollar terms than in percentages.

He also says investors should know, in dollar terms, how frequently they can withstand these moves before they start to lose sleep or get emotional. "Here's the one thing I know. When you invest, the minute your emotions get involved, you're going to make mistakes," he said.

Duran is the author of "The Money Code: Improve Your Entire Financial Life Right Now." United Capital has $21.6 billion in assets under management in 86 offices across the country.