Suze Orman was interviewed today in the New York Times Magazine. I've read before about her extreme risk aversion. In the article she comments that her net worth is about $32 million allocated $7 million to owner occupied real estate, 24 million to municipal bonds (tax free), and $1 million in stocks. She says about the stocks that she put $1 million in them because if she loses it all it doesn't matter. There is no reason to be aggressive when you are as wealthy as she is. But her attitude that "you could lose it all" by putting money in stocks (you could lose 20% of it in a day based on historic precedent) is interesting and also that only 3% of her net worth is in that asset. This would make me less likely to take her advice.
But many people seem to be interpreting this comment in an exactly opposite fashion. This is also interesting. It might be related to what economists call "money illusion". Maybe talking about a million dollars not mattering is alienating to potential followers. I wouldn't like to lose $12000. But I've certainly lost more than that in a month. I even lost 3% of my net worth on a dumb trade in one day. The latter was not a pleasant experience to say the least. But in the larger scheme of things it didn't really matter. So losing a million dollars doesn't matter to Suze.
By investing in stocks to the degree I am I am setting myself up to potentially lose a very significant chunk of net worth. And that is what happened in 2002 for example. But I think it is worth taking on some risk for return.
P.S. For economics afficionados - if I feel the same way about losing 3% of my net worth as Suze does then I am assuming we must both have logarithmic utility functions. Which can't be true if she is more risk averse than I am.