Browser wrote:I'm among those who have been unwilling to increase my equity allocation up to the level I think it "should be" based on evaluating my need, willingness, and ability to assume equity risk in my retirement portfolio. It's primarily because I'm nervous about stocks based on the volatility and poor returns since 2000 and the big run-up since 2009 that seems to me to be based more on extreme financial engineering than fundamentals. On the one hand, my reluctance to invest as much as I think I '"should" in stocks might just be a recency effect. But on the other hand, I began to ask: shouldn't one's "true" risk tolerance be based on how you feel when your gut feels that equity risks are high? Maybe my true risk tolerance is actually what I'm willing to invest in stocks now, and I've been kidding myself about what it "should" be? This might actually be the best time to reveal my actual risk tolerance going forward, and I should just recalibrate. What do you think?
I don't get it?
NEED is pretty straight forward: what return do you require? Either you own the portfolio with the highest probability of getting that return, or you hold something safer with a lower expected return and you save more or postpone your end date. NEED is the most important determinate. Need is like "I need to lose 50 pounds or I will die from diseases associated with obesity".
WILLINGNESS is just your tolerance for enduring the downside associated with the allocation you've chosen as estimated by 1929-1932, or better yet 73-74, 00-02, and 08. How does this year or last year or even 2008 change that? 2008 wasn't materially worse than 1973-1974, and that downturn should have been studied and factored in by every investor long before 2008. WILLINGNESS is actually better described as what you will have to endure to have the highest probability of success based on the right allocation you've chosen for you. The goal should be success, not to "avoid losing money".Willingness is like "the amount of your willpower to go to the gym and start eating healthier".
Now, of course, if you become unhinged during bear markets, and just know you won't be able to stay with your plan when things get rocky, either hire someone to help you refocus on long-term, or choose a safer allocation (you'll still probably panic because fear is driven by the unknown future, not the known past or present, but less losses help a little) and save more, work longer, and spend less. They are all sacrifices with no assurances.
ABILITY is tied to the stability (or lack thereof) in other facets of your life: job, income, the nature of your liabilities, etc. And these don't change much, very unlikely a market rise impacts this much--this is a personal situation.Ability is like "certain physical problems or food allergies that restrict some prescribed wellness activities".
Knowing what to do isn't that hard. Doing it (and staying with it), that's more challenging.
Too many people's investment plan's are the equivalent of: I know I hate working out so that ain't gonna happen
, and I know I love ice cream and candy bars so I'm not gonna cut those out
, but if possible I'd like to lose 50 pounds
. No way is that gonna work.