Assessing a client's risk tolerance--an individual's own assessment of his or her ability to withstand investment losses--is standard practice in the financial-planning world. The Web is full of tools to help investors gauge how they would respond if the market dropped 10%, 20%, or even 50%, and I often hear from readers who tell me that their risk tolerance is "high" or "low."

The basic premise behind getting investors to identify their pain thresholds makes sense. After all, reams of data, including Morningstar's Investor Returns, show that investors often buy high and sell low. By identifying their ability to handle losses and avoiding those investments that will cause them to sell at the wrong time, investors should be able to improve their overall return records.

Yet relying disproportionately on your risk tolerance to shape your investments carries its own big risk: namely, that you'll end up with a portfolio that doesn't help you reach your goals because you've been too aggressive or too timid. Instead, risk tolerance should take a back seat to the really important considerations, such as the size of your current nest egg, your savings rate, the years you have until retirement, and the number of years you expect to be retired. Only after you've developed a portfolio plan based on those factors should you consider making adjustments around the margins to suit your risk tolerance.

The Risk of Being Too Aggressive

Generally speaking, I'm happy to hear from investors who rate their risk tolerance as "high." These folks'

CHARLOTTE, N.C. (AP) -- If the 77 percent drop in Bank of America's first-quarter earnings is any indication, the economy may have a long way to go before it works out the problems that began with the subprime mortgage crisis.

The nation's largest retail bank on Monday quintupled the money it set aside for loans that go sour, and hinted that consumer weakness and the housing slump means that things will not get better for it, or for the economy, for some time.

"I think first it would be too early to strike up the band and sing happy days are here again," Chief Executive Ken Lewis said on a conference call with analysts during which he said the situation in the capital markets was particularly tough in March.

Like many other banks, Charlotte-based Bank of America is besieged on two sides. Its bread-and-butter banking business is ailing because with home prices flagging, more people and real estate developers are failing to repay their loans.

The credit crisis is also hobbling the value of many bank investments.

Last week, crosstown rival Wachovia Corp. said it lost $393 million in the first quarter because of bad credit and tumultuous financial markets. Washington Mutual Inc. lost $1.1 billion.

Wells Fargo & Co.'s profit fell 11 percent, JPMorgan Chase & Co.'s profit slid 50 percent, and Citigroup