What if your risk tolerance is lower than what's best for your portfolio?

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Happy2BeFree
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What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Thu Oct 18, 2018 10:26 pm

Hi, Bogleheads.

My AA is 37/63 (S/B) now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.

(Edit: clarified my AA.)
Last edited by Happy2BeFree on Fri Oct 19, 2018 9:32 am, edited 1 time in total.

mhalley
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by mhalley » Thu Oct 18, 2018 11:33 pm

Have you run the numbers to see if your savings rate can overcome the decreased returns you will get with a very conservative asset allocation? You will have to work longer to achieve financial independence if you only make 4% instead of 8% on your portfolio. The standard refrain is aa according willingness,need and ability to take risk, if your need overshadows your willingness, you might have to make some hard decisions. Cut expenses to the bone to increase savings rate, and or work x number of years longer before fully retiring.

Valuethinker
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Valuethinker » Fri Oct 19, 2018 4:27 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.
Drop your volatility until you are comfortable. And you drop your volatility the most by holding bonds.

I'd pay some Long Term Capital Gains, and move to a desired weighting.

I'd be at 60/40 tbh or if that's too far 65/ 35 E/ Bond. This "lurch" was nothing as to what a bear market is like. Wait til your stocks are down 50%. And in 2000 the bear market lasted until March 2003. There's no guarantee of a swift recovery as we had after March 2009. Bear markets can last a decade (the 1970s).

I basically recommend 2 bond funds - indeed one could hold 50/50 between them. Intermediate Term US Treasuries or US TIPS. The latter are significantly more volatile but in the long run should match inflation (and beat it by the real yield, so around 1.0% right now).

Total Bond Market would work as an alternative to IT Treasuries. Not quite as desirable, but the additional volatility should be small.

If you really don't like the thrills and spills, Short Term US Treasuries. That's more or less going to give you the returns of cash (a bit better in the long run).

ivk5
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by ivk5 » Fri Oct 19, 2018 4:50 am

Think OP meant current AA is 37% equities. If that’s too much volatility to bear (so to speak), 60-65% equities is going to cause extreme distress.

OP: have you considered annuitizing a portion of assets, to increase guaranteed income (self-made pension)?

Might make it easier to accept the risk you need to take with the rest of your assets, with less anxiety.

Explorer
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Explorer » Fri Oct 19, 2018 5:12 am

OP: We are in a period where both bonds and stocks are losing ground... in my opinion the obvious answer is to raise cash. Since FDIC insured cash (Online savings and CDs) are paying respectable yields you will fend off inflation to some extent.

I personally would not worry about paying capital gains tax in order to adjust my allocation so I can sleep well.

Good luck.

Daryl
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Daryl » Fri Oct 19, 2018 5:51 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)
I wish we spoke more about the emotional aspect of investing because it is almost impossible to understate it's importance! My goal really is to get to the point where my portfolio size and asset allocation are such that my focus really is elsewhere, even on the really bad days in the market (perhaps especially on those days!). Fixed income investments help me worry less, so I have a lot of them :)

3-20Characters
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by 3-20Characters » Fri Oct 19, 2018 6:08 am

It may help to look at it this way.

Example:

Say your portfolio was 1.1m and a sell off in stocks brought it down to 1m.

Perspective #1: Wow! You just lost 100k (over 2 years of expenses). That sucks!

Perspective #2:
SWR (4%)
1.1m = 44,000
1m = 40,000

Does it suck to have 4K less to spend? Yes. Is it a disaster? If not, carry on.

Disclaimer: Yes, I know that’s not how the 4% SWR works. Just making a point.

Dandy
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Dandy » Fri Oct 19, 2018 6:40 am

I feel your pain. It isn't an easy thing to keep investing when you get depressed when the stock market drops. If you don't have "enough" then maybe a target or balanced fund might be helpful. It will soften the blow of a market decline yet rebalance when you might not. Of course that is likely for your tax advantaged assets since you want to avoid cap gain taxes.

If you have enough you might feel better by having X years in "safe" fixed income e.g. Savings, Money Market, CDs, etc. That might mitigate the effects of rising interest rates over the short term. You might withdraw from your taxable equities and incur the cap gains. Overall that might not result in too much taxes and would gradually reduce the taxable equities while you offset that with tax advantaged equities in a balanced type fund. Or take taxable dividends vs reinvesting them and again using some tax advantaged space to increase equity exposure in your tax advantaged space.

When you get older you might want to supplement your Social Security with an immediate annuity or QLAC to off load some of the worry/risk/management to an insurance company. You probably should wait as long as you can to collect SS to reduce pressure on your portfolio.

I would cut back on listening to financial news and accessing your account. Too much focus on that will only increase your anxiety.

Ron Scott
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Ron Scott » Fri Oct 19, 2018 7:58 am

I disagree with the common wisdom here. Two comments:

1. Maintain a minimum of 25% in equities. At about 40% you’re fine and should consider doing nothing.

2. Forget the psychological gibberish concocted by financial advisors and economists, that individuals have some kind of natural “risk tolerance” that should determine their asset allocation. They make stuff up and don’t know what they’re talking about. Instead, consider the problem rationally and work on changing your fears. Money invested for the long term will grow as dividends and profits grow. In the short term and intermediate term stock prices will vary because traders mistakenly believe they can predict the future and emit knee-jerk reactions by buying and selling to others who make different predictions. FORGET THE SHORT TERM B____T AND ONLY KEEP IN EQUITIES MONEY YOU DONT PLAN ON SPENDING FOR 15 YEARS OR SO.

Your goal should be to alter your beliefs which are driving your emotions. Read Bogle’s Little Book and the BHs Guide.

Many people have changed their minds based on more information and rational thinking. You can too.

Don’t listen to those who tell you you have some internal, immutable asset allocation mechanism based on sleep and fear.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

goblue100
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by goblue100 » Fri Oct 19, 2018 8:10 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)
How do you know how much you lost over the last week? I look at my accounts regularly, but only do an accounting quarterly. I know I'm down from where it was but I honestly have no idea exactly how much. It's better this way.
Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.
My advice would be to maintain a minimum of 30% equities and try to tune out the noise.
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

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goingup
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by goingup » Fri Oct 19, 2018 8:30 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired.
That's a big problem because if you own either stock funds or bond funds you are going to have losses.
Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.
Risk and return. Can't have one without the other.

Standard advice is get an AA that is appropriate and don't look at your portfolio very often. Maybe buy CDs, and consider purchasing an annuity (SPIA) when you retire. :beer

KlangFool
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by KlangFool » Fri Oct 19, 2018 8:43 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week.
Happy2BeFree,

How big is the loss? 2% of your portfolio? If it is true, your portfolio is 50 times your annual expense. What is the problem? This is the problem that most of us would like to have. Aka, your portfolio is big enough that you can lose 50% and it won't be a problem.

The only way for this week to cause you to lose one year of expense is your portfolio is very big as compared to your annual expense. I would like to have your problem.

I lose about 0.5 years of expense this week. My portfolio is only 20 times my annual expense. If I lose a lot more this week, it meant that my portfolio is a lot bigger. I would celebrate.

How big is your portfolio in term of your annual expense?

KlangFool

P.S.: My portfolio is 60/40.

pkcrafter
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by pkcrafter » Fri Oct 19, 2018 8:55 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

Happy, we really need more information such as are you withdrawing anything now? What percentage of assets will you be withdrawing when you fully retire? 37% equity is about the minimum you can hold while withdrawing 4% and still maintaining portfolio value. You can go lower, of course, but you could run into problems down the road as total assets diminish. If you have a withdrawal rate less than 4%, you can go lower in equity.

Your comments about losing money in a slight correction (verrrry short term) means you are focusing on isolated incidents and not the whole picture. Don't micromanage.

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

All decisions involve compromise. Portfolio growth requires a reasonable allocation to stocks. Not wanting risk means lowering stock allocation. I would not recommend 20/80 for a retiree, but if your withdrawal rate is 2-2.5% then it may be OK.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

As already noted, you must have a balance between what you like and don't like, there never is a perfect portfolio. Too much equity, you will worry about volatility. Too much non-equity, you will worry about losing spending power and portfolio value.

Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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leeks
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by leeks » Fri Oct 19, 2018 9:17 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70.
How would a change in the asset allocation trigger a different tax? Our long-term savings have not yet entered into taxable (all IRA/401K) so I know less about that. I would like to understand this for the future. I didn't think the IRS knows or cares about your asset allocation.

pkcrafter
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by pkcrafter » Fri Oct 19, 2018 9:39 am

leeks wrote:
Fri Oct 19, 2018 9:17 am
Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70.
How would a change in the asset allocation trigger a different tax? Our long-term savings have not yet entered into taxable (all IRA/401K) so I know less about that. I would like to understand this for the future. I didn't think the IRS knows or cares about your asset allocation.
Taxable account. OP should list his portfolio and where funds are held. Maybe he can do adjusting in tax-advantaged accounts.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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HomerJ
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by HomerJ » Fri Oct 19, 2018 9:42 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.
Sure, market was down 5% over the past couple of weeks (but up almost 1% so far today).

But the market was up 10% this year before the drop, so your stocks are still up 5% on the year. Maybe that would help your state of mind.

But here's my real takeaway. If a 5% stock market drop in a couple of weeks was only 40% of your portfolio (and bonds stayed pretty even these past few weeks), that means a year of expenses was only 2% of your portfolio.

If you are at 50x expenses, you've won the game, and you can certainly dial back. Go to 30/70 (or even 25/75) if that will help you sleep at night. I don't know why you think you "need the continued growth". You don't want to get all the way out because of inflation, but you can certainly sell back a bit.

You're just going to have to accept that the market goes up and down. There WILL be another 50% crash someday. You WILL (hopefully temporarily) lose 50% of your stock portfolio. But in the long run, it should grow.

At 25/75, a 50% crash would only be 12.5% of your portfolio.

But here's the thing... At 50x expenses, the 2% dividends from stocks and the 3% dividends from bonds ALONE give you more than you spend each year.

There's no reason to even look at your balances during a crash.
Last edited by HomerJ on Fri Oct 19, 2018 9:46 am, edited 1 time in total.
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ivk5
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by ivk5 » Fri Oct 19, 2018 9:45 am

leeks wrote:
Fri Oct 19, 2018 9:17 am
Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70.
How would a change in the asset allocation trigger a different tax? Our long-term savings have not yet entered into taxable (all IRA/401K) so I know less about that. I would like to understand this for the future. I didn't think the IRS knows or cares about your asset allocation.
If a portion of assets are in taxable, and there are unrealized gains, changes in AA may require selling appreciated shares, triggering a capital gains tax. This is especially true if the portion of assets in taxable is large and the unrealized gains are large.

I think OP is saying he/she can get from 37% equities (current) to 30% equities without realizing any gains, but further shift from equities to fixed income would require selling shares with unrealized gains, triggering a tax liability.

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unclescrooge
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by unclescrooge » Fri Oct 19, 2018 10:33 am

HomerJ wrote:
Fri Oct 19, 2018 9:42 am
Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.
Sure, market was down 5% over the past couple of weeks (but up almost 1% so far today).

But the market was up 10% this year before the drop, so your stocks are still up 5% on the year. Maybe that would help your state of mind.

But here's my real takeaway. If a 5% stock market drop in a couple of weeks was only 40% of your portfolio (and bonds stayed pretty even these past few weeks), that means a year of expenses was only 2% of your portfolio.

If you are at 50x expenses, you've won the game, and you can certainly dial back. Go to 30/70 (or even 25/75) if that will help you sleep at night. I don't know why you think you "need the continued growth". You don't want to get all the way out because of inflation, but you can certainly sell back a bit.

You're just going to have to accept that the market goes up and down. There WILL be another 50% crash someday. You WILL (hopefully temporarily) lose 50% of your stock portfolio. But in the long run, it should grow.

At 25/75, a 50% crash would only be 12.5% of your portfolio.

But here's the thing... At 50x expenses, the 2% dividends from stocks and the 3% dividends from bonds ALONE give you more than you spend each year.

There's no reason to even look at your balances during a crash.
If a portfolio that is 60% bonds is causing stress in a year when bonds are down and US stocks are up, then buying more bonds in a rising interest rate environment is not going to help.

Everyone talks about a stock market crash, but what about bond losses?

OP, please state what your holdings are. And what you believe to be your year-to-date returns to be.

Happy2BeFree
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 10:46 am

Many, many thanks to all who took the time to respond and give your perspectives. I truly appreciate your help, guidance, and suggestions. Here are my responses so far:

mhalley: I'm not saving at the moment because I'm working sporadically and use the $$ to fund current expenses. I realize I might want to pick up more work if I can or consider learning to deal with a higher equity %.

Valuethinker: Sorry, I have 37% equity now. My FI is mostly CDs and others whose principal is stable; I'm also considering individual treasuries since I don't like seeing "losses" in bond funds! In tax-deferred I do have corp bonds in Wellesley/Wellington. Are you not a fan of corp bonds? The scenario you spoke about, another 50% bear that might not be quick to retreat, is a big fear now that I’m semi-retired and unable to take advantage of buying low.

ivk5: I did look into fixed annuities, but rates were very low, especially at my age. But for reasons you stated, I will consider it again when I’m older.

Explorer: Yes, that’s exactly what I’m doing now. CDs, possibly individual treasuries, Prime MM, HY savings. I wanted to sell off 10-15% in taxable a couple weeks ago, since I’m in a very low tax bracket, but I have to mind the ACA cliff and since I’m making a little earned income now, I’m very wary of adding cap gains. I wouldn’t know how much to safely sell, and am not a DIY w/taxes. At least I’m not reinvesting divs/CGs.

Daryl: Right on!

3-20Characters: Understood, and good point. Perspective is probably what I need right now. Don’t like being driven by fear, but not sure how to change that.

Dandy: All great points. Most of my FI is in stable-principal products, as you suggested. And I’d have sold off some index funds, but I also have the ACA cliff to mind. I mostly have W/W in tax sheltered, and I’d hate to sell them off to reduce equity exposure; they’re great balanced funds that hide volatility pretty well. Therein lies my dilemma and why I haven’t sold anything yet. I will think about SS and annuities as I get older.

Ron Scott: Yes, I’ve read many BH investing books, including JB’s Little Book, but it’s been a while. I’ve lost a lot of money in various bears, but didn’t have as much as I do now, so I have fears I didn’t before, mostly because I’m not working FT and adding to retirement. I wish I could be okay with 40/60, and yet the lowest I can probably go is 30/70 because I do worry about losing purchasing power. Perhaps I can work to toughen up a little.

goblue100: Yes, I look every single day! Maybe not the best. And 30% sounds like a good compromise to me. Just hope the market doesn’t help get me there.

goingup: I hear you. Not even sure what’s appropriate for me, though, apart from risk tolerance. It’s such a personal decision.

KlangFool: Interesting. Here’s where I lose perspective. I think I “lost” about 3%; I’m about 35x current annual expenses (though expenses will go up if I buy a residence). I think at my age (mid-50s), I’m in good shape, but not sure I can lose 50% and be fine. Do you disagree?

Pkcrafter: Yes, withdrawing about 2.5% now because I have some outside income (it’s variable, not sure how long it’ll last, so don’t want to count on it). If this is a minor blip and things come back by end of year, I think I’ll sell down to 30-35% and see how that feels. But I realize that in a big bear, the losses will hurt whether I’m at 30% or 37%. Your points are well taken.

leeks: To get to 30/70, I’d sell everything in my retirement accounts, so no tax penalty. To get to 20/80, I’d have to sell funds in taxable, which would incur cap gains tax.

Again, thank you so much, everyone, for your input...it really helps. :happy

Happy2BeFree
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 12:07 pm

HomerJ wrote:
Fri Oct 19, 2018 9:42 am

Sure, market was down 5% over the past couple of weeks (but up almost 1% so far today).

But the market was up 10% this year before the drop, so your stocks are still up 5% on the year. Maybe that would help your state of mind.

But here's my real takeaway. If a 5% stock market drop in a couple of weeks was only 40% of your portfolio (and bonds stayed pretty even these past few weeks), that means a year of expenses was only 2% of your portfolio.

If you are at 50x expenses, you've won the game, and you can certainly dial back. Go to 30/70 (or even 25/75) if that will help you sleep at night. I don't know why you think you "need the continued growth". You don't want to get all the way out because of inflation, but you can certainly sell back a bit.

You're just going to have to accept that the market goes up and down. There WILL be another 50% crash someday. You WILL (hopefully temporarily) lose 50% of your stock portfolio. But in the long run, it should grow.

At 25/75, a 50% crash would only be 12.5% of your portfolio.

But here's the thing... At 50x expenses, the 2% dividends from stocks and the 3% dividends from bonds ALONE give you more than you spend each year.

There's no reason to even look at your balances during a crash.
HomerJ...thanks for your input. I'm at about 35x expenses; how would you say that changes things? Or does it? If I were 50x expenses, I'd definitely reduce exposure, but I'm not there.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by KlangFool » Fri Oct 19, 2018 12:14 pm

Happy2BeFree wrote:
Fri Oct 19, 2018 12:07 pm
HomerJ wrote:
Fri Oct 19, 2018 9:42 am

Sure, market was down 5% over the past couple of weeks (but up almost 1% so far today).

But the market was up 10% this year before the drop, so your stocks are still up 5% on the year. Maybe that would help your state of mind.

But here's my real takeaway. If a 5% stock market drop in a couple of weeks was only 40% of your portfolio (and bonds stayed pretty even these past few weeks), that means a year of expenses was only 2% of your portfolio.

If you are at 50x expenses, you've won the game, and you can certainly dial back. Go to 30/70 (or even 25/75) if that will help you sleep at night. I don't know why you think you "need the continued growth". You don't want to get all the way out because of inflation, but you can certainly sell back a bit.

You're just going to have to accept that the market goes up and down. There WILL be another 50% crash someday. You WILL (hopefully temporarily) lose 50% of your stock portfolio. But in the long run, it should grow.

At 25/75, a 50% crash would only be 12.5% of your portfolio.

But here's the thing... At 50x expenses, the 2% dividends from stocks and the 3% dividends from bonds ALONE give you more than you spend each year.

There's no reason to even look at your balances during a crash.
HomerJ...thanks for your input. I'm at about 35x expenses; how would you say that changes things? Or does it? If I were 50x expenses, I'd definitely reduce exposure, but I'm not there.
Happy2BeFree,

Come on. You are 50+ years old. Your portfolio is 35X. What would be your portfolio size in term of annual expense after deducting social security income?

In my case, the 25X will become 50X since social security cover 50% of my expense. In your case, it might be 70X after social security.

KlangFool

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by 3funder » Fri Oct 19, 2018 12:22 pm

If you need a certain asset allocation to provide sufficient growth to your portfolio and you are not a panic seller, it would be unwise to choose an AA that varies dramatically from the appropriate AA, even if it means you have some trouble sleeping at night. At your age, your AA is pretty conservative. I'd be careful about overdoing things.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by dcarste » Fri Oct 19, 2018 1:39 pm

Sir, I did this for my father who is in a very similar position. Think of it as this - based on your responses you have 'WON the 'Game' of investing - meaning you have reached an amount of assets to where you can live and not work much, and use your savings to live - called Critical Mass. There is NO need to take on additional undue risk when you have won the game and are able to support yourself on a little bit of part time work and your portfolio. This is a great time in a historic runup to take money off the table if you decide you want less risk. To take out my fathers worry, I did the following.

1. Reduce his number of funds and stick to a written investment plan, re balancing only ONCE a year in first week of January each year.

2. In your taxable account, split the taxable gains over this year and next when switching to this recommended easy portfolio, unless you have crazy capital gains like 150K or something like that, which then would prob be better to spread over 3 years. It is much better peace of mind wise in your situation to get to the exact same funds and percentages in your investment accounts. In your case listening to you, simplification, and not penny pinching taxes and working arounds like holding all stocks in taxable and then figuring out different percentages in your tax advantage accounts. Having the same funds and percentages makes it easy.

4. Benjamin Graham, legendary investor, said never to own less than 25% stocks or more than 75% stocks, he was Warren Buffets mentor.

5. Since I would basically consider you both 1)very risk averse but want some gain and 2) basically retired I would do the following based on a few factors.

a) great time to do this after unprecedented gains in the stock market, so selling down stocks right now is a good time.

b) while I used to LOVE wellington and wellesly funds, their credit risk on the fixed income side of their holdings has decreased too much due to them following a fixed income benchmark - as last 5 years has resulted in the most corporate debt in history and average corporate credit rating is triple B, close to junk. You want a higher credit rating in your fixed income holdings due to the binging on debt by corporations. Wellington and Wellesley only hold 18% of their fixed income in treasuries, and for you that is totally way too risky if you don't like bigger drawdowns - they are holding a lot of lower quality bonds compared to what I saw 10 years ago. Switching to the bond fund recommended below will greatly increase the credit quality of your bonds. Corporate bond funds lost money during 2008 by the way, while treasury holdings increased in value.

So here is my solution which simplifies everything, and I emphasize not to worry too much about capital gains unless your talking a crazy amount. Spread it out over this year and next year, don't let some taxes get in the way of simplification which helps in not making stupid decisions in down markets.

Here is my recommendation:

30% Stocks, 70% Bonds - the same recommendation Vanguard gives in their 'Target Retirement Income' Fund which is basically for retired people. However I prefer the 3 fund portfolio I show below.

Each account set up in these percentages, re Balanced one a year. When you have to sell some money from the funds when you need some money, take it out of whatever funds, so you end up back to your stated allocation plan. I usually call them and let them do the math. Here is the allocation:

25% Vanguard Total US Stock Market Index
5% Vanguard Total International Stock Index
70% Vanguard Total Bond Market Index.

Based on this recommended portfolio - here are your results -

Over past 21 years, only 1 year had a loss - the historic 2008 financial crisis. You wouldn't have even lost money in any year during the dot com bust.
Average annual return over past 21 years, 6.15%.

In 2008, the only year in the 21 years of data I could look at, your portfolio would have loss only -7.93%. However, it took only 11 months for your portfolio to return to your previous highest balance (recover fully).

Hope that helps, that would def. make me sleep easy knowing only 1 year out of 21 my portfolio lost money, but it regained all of that loss in 11 months and then resumed going higher.

And hold 6 to 8 months of an Emergency savings account in cash at a bank like Ally Bank high yield savings account (current yield 1.9%). So stated allocation above + 6 to 8 month of cash in a high yield savings account, with that emergency fund amount determined by using a bare bones penny pinching amount you could get away with spending each month (like temporarily cancelling cable and not going out to eat etc.).
Last edited by dcarste on Fri Oct 19, 2018 2:31 pm, edited 4 times in total.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by randomizer » Fri Oct 19, 2018 1:50 pm

It stocks keep going down you will hit 20:80 without having to lift a finger.
87.5:12.5, EM tilt — HODL the course!

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 3:11 pm

KlangFool wrote:
Fri Oct 19, 2018 12:14 pm

Happy2BeFree,

Come on. You are 50+ years old. Your portfolio is 35X. What would be your portfolio size in term of annual expense after deducting social security income?

In my case, the 25X will become 50X since social security cover 50% of my expense. In your case, it might be 70X after social security.

KlangFool
KlangFool: My SS will be pretty low, but I see your point. Thanks.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 3:14 pm

dcarste wrote:
Fri Oct 19, 2018 1:39 pm
Sir, I did this for my father who is in a very similar position. ...
dcarste: Thanks so much for your long and thoughtful reply.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 3:16 pm

randomizer wrote:
Fri Oct 19, 2018 1:50 pm
It stocks keep going down you will hit 20:80 without having to lift a finger.
:oops: :oops: :oops: :mrgreen:

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by HomerJ » Fri Oct 19, 2018 3:16 pm

Happy2BeFree wrote:
Fri Oct 19, 2018 12:07 pm
HomerJ wrote:
Fri Oct 19, 2018 9:42 am

But here's the thing... At 50x expenses, the 2% dividends from stocks and the 3% dividends from bonds ALONE give you more than you spend each year.

There's no reason to even look at your balances during a crash.
HomerJ...thanks for your input. I'm at about 35x expenses; how would you say that changes things? Or does it? If I were 50x expenses, I'd definitely reduce exposure, but I'm not there.
A 30/70 stocks/fixed-income should be kicking off 2.7% in dividends each year. 20/80 kicks off 2.8% (assuming 2% dividends for stocks, 3% for bonds/CDs)

35x expenses is a 2.85% withdrawal rate.

You're basically living off the interest at this point. And interest rates are trending higher. You can certainly go more conservative if it helps you sleep at night.

And like Klang says, Social Security is coming at some point.
The J stands for Jay

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by KlangFool » Fri Oct 19, 2018 3:19 pm

Happy2BeFree wrote:
Fri Oct 19, 2018 3:11 pm
KlangFool wrote:
Fri Oct 19, 2018 12:14 pm

Happy2BeFree,

Come on. You are 50+ years old. Your portfolio is 35X. What would be your portfolio size in term of annual expense after deducting social security income?

In my case, the 25X will become 50X since social security cover 50% of my expense. In your case, it might be 70X after social security.

KlangFool
KlangFool: My SS will be pretty low, but I see your point. Thanks.
Happy2BeFree,

You have nothing to worry about. If you want to change your AA to 30/70, that is fine too. But, at your current AA (37/63), even if the stock market drops 50%, your portfolio will be at (81.5%) 28.5 times your annual expense. You have plenty of money to live on until social security kick in.

KlangFool

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by rkhusky » Fri Oct 19, 2018 3:37 pm

Note that Vanguard's Target Retirement series glide to a terminal 30/70 portfolio, so choosing that ratio is perfectly sensible, especially with a portfolio that is 35x expenses.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by celia » Fri Oct 19, 2018 4:14 pm

What many people do when they are starting retirement is set aside 3 to 5 years of living expenses in a CD or money market account and let the rest of the portfolio grow. Possibly they move those "safe" living expenses to a different custodian. They don't withdraw from them unless the markets are down a lot (say, 30% or more from the most recent high). The remainder of their portfolio can have a more aggressive asset allocation, possibly 50:50 for you. They withdraw from that while the markets are stable or going up but never more than 4% a year.

This split lets them sleep at night knowing that they have several years of living expenses covered for sure. And they just let the invested part grow or shrink as it will, although growth happens more often than shrink.

Are your assets big enough that something like that would be possible for you?

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by bertilak » Fri Oct 19, 2018 5:09 pm

"What if your risk tolerance is lower than what's best for your portfolio?"

Then you need a better risk tolerance.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 6:19 pm

Thanks again to all who've offered insights...this has been extremely helpful!

HomerJ and KlangFool: Before I posted, I felt I was in good shape; I didn't realize how good. Really appreciate your putting things into terms that help drive the point home!

rkhusky: I had wondered about that but was concerned that I was too young for 30/70. This has been an eye-opener.

celia: At 5 years' expenses in CDs and 50/50 with the rest, I'd be overall 43/57 AA—higher than I'd be comfortable with, but I like the concept you're talking about. Something to ponder.

bertliak: Straight to the point! Understood.

I'm so grateful for the much-needed perspectives you all have given me. I'll have to decide my next steps, but no matter what, I feel a lot better. Thank you!! :sharebeer

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by TravelforFun » Fri Oct 19, 2018 6:33 pm

Money is not worth it if you or your wife can't sleep at night.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by SoAnyway » Fri Oct 19, 2018 10:03 pm

TravelforFun wrote:
Fri Oct 19, 2018 6:33 pm
Money is not worth it if you or your wife can't sleep at night.
+1.

OP, I'm early 50s, in pre-slash-semi- retirement also. Planning to retire next year. It's a weird place, given that I fully expect a correction in the coming years. (Part of me actually hopes for a correction, since I'll be doing aggressive Roth conversions after my earned income goes to zero, but that's a different topic.) Pre-Medicare health care costs and Sequence-of-returns risk are significant concerns. Like you, I have "EnoughX" per the calculators, even with my conservative estimates. I probably have way more in FI than what's (air quotes) "best" for my portfolio, even taking into account that I'm following Kitces's bond tent strategy. My $.02:

1. I don't like losing money, either. That's why I don't peek at my short-term "paper" losses. My semi-job requires me to know what the markets are doing generally on a daily basis, so I know when stocks or bonds are getting trounced. Those are the times when it's esp. important for me to have a "RULE" in my head that I follow to distract myself (similar to what people quitting any bad habit do): "Every time I have an urge to look at what my portfolio's doing, I will do _____ instead." In your case, fill in the blank with whatever you like and what fits with whether you're in an office or home environment - Go for a run, check the box scores, go have a chat with a neighbor/co-worker, organize your junk/desk drawer, check your tire pressure, watch one of the shows on your DVR you've not gotten to, whatever you can think of that will distract you until the urge goes away. Eventually, not looking except for the annual re-balance will become the habit.

Kudos to you for staying the course thus far, and I "get" how things seem a bit different now that the portfolio is way larger than when you started, and you're more fearful of losing it as retirement nears. Bottom line: You've been through enough corrections and bull runs to know that they just happen in an unpredictable cycle that's outside your control. IOW, OP: STOP looking at how much you gained or lost on paper in the last couple weeks. Frankly, I've no idea how much I lost in the last couple weeks and don't care to know. It would probably only make me do something stupid. What I DO know is that I have enough in "safe" assets to cover my spending needs for enough years to weather the storm. Stay the course.

2. Stop caring about what anyone else says is "best" for your portfolio. Sleeping well at night through all the ups-and-downs is important. Only YOU know what that AA is. And as someone else said, if the recent past IS indeed the beginning of a significant correction like '87/'01/'07 (not saying it is - no one knows, so not worth debating), without doing anything your AA will be re-balancing to something closer to your comfort zone (30/70, then 20/80) with none of the tax implications of selling out of taxable!

3. I highly recommend that you review nisiprius's OUTSTANDING post about "EVALUATING jitters", from when the market took a bit of dip in 2011 after a very welcome run-up from the financial crisis. It is stickied to the top of the "Investing - Theory, News & General" sub-forum. You can find it here. Of all the thousands of thoughtful, well-written, level-headed and incisive posts on this forum, it's the one I wish I had written.

4. Ask yourself, "What's the absolute worst that can happen if you fall below your financial independence standard despite all the best-laid plans?" My answer - and I gather from your OP it'd be yours too - I get a job. Just like I've always done, and just like thousands of people do every day. No big whoop. Maybe some part-time gig somewhere, given the cushion built over time. Hey! It might be fun! I can get out, meet new people, learn new stuff, etc.... And given that most folks haven't saved anything for retirement, you're well above the average....

Life's a journey. All best, OP. Stay the course.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by HEDGEFUNDIE » Fri Oct 19, 2018 10:09 pm

bertilak wrote:
Fri Oct 19, 2018 5:09 pm
"What if your risk tolerance is lower than what's best for your portfolio?"

Then you need a better risk tolerance.
+1.

Go buy a motorcycle. Go skydiving. Become a Buddhist.

Lots of ways you can acclimate yourself to handle more risk / detach from the world so risk doesn’t matter.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 10:25 pm

3funder wrote:
Fri Oct 19, 2018 12:22 pm
If you need a certain asset allocation to provide sufficient growth to your portfolio and you are not a panic seller, it would be unwise to choose an AA that varies dramatically from the appropriate AA, even if it means you have some trouble sleeping at night. At your age, your AA is pretty conservative. I'd be careful about overdoing things.
3funder, sorry, I missed your post earlier. Thanks for your thoughts. You've all given me a lot to consider.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by SoAnyway » Fri Oct 19, 2018 10:39 pm

HEDGEFUNDIE wrote:
Fri Oct 19, 2018 10:09 pm
bertilak wrote:
Fri Oct 19, 2018 5:09 pm
"What if your risk tolerance is lower than what's best for your portfolio?"

Then you need a better risk tolerance.
+1.
Go buy a motorcycle. Go skydiving. Become a Buddhist.
Lots of ways you can acclimate yourself to handle more risk / detach from the world so risk doesn’t matter.
Hahaha, HedgeFundie.
OP, you have a choice. Either:
#1. You accept that your risk tolerance is what it is (as I have), and you adapt your behavior to it. See my earlier post for some ideas on ways to do that. OR
#2. You decide that it's important to you/your ego/how you define yourself to "prove" that you can tolerate higher risk than your post indicates. If that's the case, HedgeFundie has provided some ideas for how to do that. If you went that route, I would of course wonder what you feel you need to prove to anyone (given your success) and to whom, but whatever. Not judging! Risk tolerance is personal, as is the path to determining what it is and the appropriate AA to accommodate it.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Fri Oct 19, 2018 11:32 pm

TravelforFun, HEDGEFUNDIE, and SoAnyway...WOW. I can't think of a better wrap-up to this thread of great ideas and insights.

SoAnyway, believe it or not, I reread Nisiprius's awesome post a couple weeks ago, when I started thinking again about selling equities. I was getting jittery, but didn't sell anything because I still wasn't sure I was ready. Now I'm ready, but the market might be on its way down. We'll see.

I never considered not checking my funds every day. It's been a hobby (and a habit), and for several years. But you're right: I need to focus on other things now because sometime sooner or later, we'll all be seeing red. And I really appreciate your perspective on worst-case scenarios...which aren't really worst case at all!

Oh, and I choose #1!! I have no ego about this; I just needed to feel that I wasn't being foolish by lowering my equities too much. Inflation is a concern as well, so if 30% is enough (I'd thought 40% was the lowest I could reasonably go at my age and if I wanted a normal SWR), I hope to get there by my own choice, not the market's!! Guess we'll see about that. :beer

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by 3funder » Sat Oct 20, 2018 7:24 am

Happy2BeFree wrote:
Fri Oct 19, 2018 11:32 pm
TravelforFun, HEDGEFUNDIE, and SoAnyway...WOW. I can't think of a better wrap-up to this thread of great ideas and insights.

SoAnyway, believe it or not, I reread Nisiprius's awesome post a couple weeks ago, when I started thinking again about selling equities. I was getting jittery, but didn't sell anything because I still wasn't sure I was ready. Now I'm ready, but the market might be on its way down. We'll see.

I never considered not checking my funds every day. It's been a hobby (and a habit), and for several years. But you're right: I need to focus on other things now because sometime sooner or later, we'll all be seeing red. And I really appreciate your perspective on worst-case scenarios...which aren't really worst case at all!

Oh, and I choose #1!! I have no ego about this; I just needed to feel that I wasn't being foolish by lowering my equities too much. Inflation is a concern as well, so if 30% is enough (I'd thought 40% was the lowest I could reasonably go at my age and if I wanted a normal SWR), I hope to get there by my own choice, not the market's!! Guess we'll see about that. :beer
Go for 30% if it suits you; my point before was that it's important to maintain at least a modest exposure to equities.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Sheepdog » Sat Oct 20, 2018 8:36 am

Dear Happy2BeFree,
I am who I am. You are who you are. Some can be 100% stocks at age 65 and live with it. Others can't invest in stocks at all...zero. I was not comfortable with 60% at retirement, for example. I did have that much at 65 but with every down day, it hurt. Growing up in the Depression and seeing my parents lose their home and not have meaningful employment for over 10 years, seeing men come to our door asking for a sandwich to take out our garbage, can do that. (We were living in someone's basement then.) I could live and fight with physical fear, but not fear over money resulting in restlessness and lack of sleep....that kind of fear can be terrible.
I have been at 23 to 25% stocks for over 10 years. I dropped my percentage gradually after retiring at 65 (now 85). I have lived off of that plus SS just fine and have had enough growth even to keep up with my inflation. Ten years ago in 2008 convinced me that l was right. Even then with low equities and living off of savings (taking out four and a half percent annually) and SS, my portfolio still dropped over 15% that year and I was scared even then thinking things like what if this continues for years?..... (It didn't take too long to recover that thankfully.)
Don't feel that you are wrong. You aren't. Not for you.
Jim
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Sat Oct 20, 2018 10:14 am

Sheepdog wrote:
Sat Oct 20, 2018 8:36 am
Dear Happy2BeFree,
I am who I am. You are who you are. Some can be 100% stocks at age 65 and live with it. Others can't invest in stocks at all...zero. I was not comfortable with 60% at retirement, for example. I did have that much at 65 but with every down day, it hurt. Growing up in the Depression and seeing my parents lose their home and not have meaningful employment for over 10 years, seeing men come to our door asking for a sandwich to take out our garbage, can do that. (We were living in someone's basement then.) I could live and fight with physical fear, but not fear over money resulting in restlessness and lack of sleep....that kind of fear can be terrible.
I have been at 23 to 25% stocks for over 10 years. I dropped my percentage gradually after retiring at 65 (now 85). I have lived off of that plus SS just fine and have had enough growth even to keep up with my inflation. Ten years ago in 2008 convinced me that l was right. Even then with low equities and living off of savings (taking out four and a half percent annually) and SS, my portfolio still dropped over 15% that year and I was scared even then thinking things like what if this continues for years?..... (It didn't take too long to recover that thankfully.)
Don't feel that you are wrong. You aren't. Not for you.
Jim
Dear Jim,
I remember reading your posts of 10 years ago, and they made a big impression on me. There is nothing like real-time telling of the financial meltdown and what feelings and actions resulted from it. I appreciate your sharing that because it helps so many of us. Living through the Depression made an indelible impression on a lot of folks, like you, like my mother. I can't imagine what that must have been like. I started investing in the mid-80s, the boom years. I was 100% stock funds in my 20s and 30s; lost a ton in the dot-com bust (knew nothing of diversification, just rode the tech wave), had to build back up on a modest income (I was a super-saver), then was about 70/30 when 2008/9 hit, and I lost another ton and started raising cash (too afraid to buy any more funds). Then a few years later I found Bogleheads, and now I find I don't want to take on more risk than I absolutely have to. I've had enough.

I agree, we are who we are. And I appreciate your kindness. I'm considering all responses to this thread, all angles, because there's wisdom in each one. It's time to settle on a decision that, as you said, is right for me, and it might take a few steps to get there. Truly, this thread (and the whole forum) is pure gold. Thank you for sharing your thoughts, Sheepdog. I appreciate it very much. :happy

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by abc132 » Sat Oct 20, 2018 10:35 am

Happy2BeFree wrote:
Thu Oct 18, 2018 10:26 pm
Hi, Bogleheads.

My AA is 37/63 (S/B) now, after this slight correction. I lost more than a year's expenses in one week. I just hate losing money, even if it's only paper losses, especially now that I'm semi-retired. (I've lived through bears and recessions and don't panic sell. But my mood goes south.)

I'd love to be at 20/80, but then I'd have to pay cap gains, so the lowest I can go without tax penalty is 30/70. I know that's low for my age (mid-50s); I have no pension, just SS whenever I decide to take it. I'm in good shape after this run-up, but I do need the continued growth; I just don't want to take unnecessary risks.

When your risk (or volatility) tolerance is low, what do you do? Suck it up and learn to deal with it, or accept your low tolerance and sell down to where volatility doesn't bother you (as much)?

Thanks for your thoughts.

(Edit: clarified my AA.)
I think the core issue may be your fear of losing money. Spending saved or well-invested money is a more sure thing than depending on current earnings. People can lose their job at any moment or run into heath problems that prevent them from working. If you were less stressed during those accumulation years, think about all the protection that portfolio is now providing you.

That wealth you have invested is insurance against bad things happening. Remember that the more your wealth has a chance to grow, the more insurance you have against bad things happening. Reducing your stock exposure in your 50's too low will actually increase your risk of running out of money.

Your current asset allocation may be in line with your risk tolerance - if you can make your goal to minimize risk instead of to never lose money. I would recommend taking some time to think about how you view money before making any investment decisions. The transition is from saving and increasing that portfolio to learning how to enjoy spending that money you have accumulated.

You should focus on doing what makes you happy. If part time work eases your fears, or is enjoyable, do it for as long as those things are true. I would decrease the time you spend looking at financial news if that is causing you anxiety.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by 3-20Characters » Sat Oct 20, 2018 10:36 am

There’s nothing wrong with 30% equities if it works for you.

https://seekingalpha.com/article/303663 ... r-retirees

The Center Of Gravity For Retirees
Rick Ferri - Mar. 29, 2015 2:52 PM ET
I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds. This is a conservative mix that has enough equity to growth with inflation and enough fixed income to keep portfolio volatility at bay. Historically, a 30/70 allocation has earned the highest Sharpe ratio. This is the point on the efficient frontier that has earned the best risk-adjusted return as illustrated in Figure 2.
It might help you to run some stress tests with a 50% decline in stocks and see your actual numbers. In my case, I don’t want to go with 30%. I consider anything between 40-60 my sweet spot. 60% seems high to me in this environment and I find that the difference between 40% equities and 50% equities doesn’t make me feel any “less nauseous” to my overall portfolio drop so I just go with a 50/50 aa.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Sat Oct 20, 2018 11:32 am

3-20Characters wrote:
Sat Oct 20, 2018 10:36 am
There’s nothing wrong with 30% equities if it works for you.

https://seekingalpha.com/article/303663 ... r-retirees

The Center Of Gravity For Retirees
Rick Ferri - Mar. 29, 2015 2:52 PM ET
I propose the center of gravity for those who have accumulated enough for retirement to be 30% stocks and 70% bonds. This is a conservative mix that has enough equity to growth with inflation and enough fixed income to keep portfolio volatility at bay. Historically, a 30/70 allocation has earned the highest Sharpe ratio. This is the point on the efficient frontier that has earned the best risk-adjusted return as illustrated in Figure 2.
It might help you to run some stress tests with a 50% decline in stocks and see your actual numbers. In my case, I don’t want to go with 30%. I consider anything between 40-60 my sweet spot. 60% seems high to me in this environment and I find that the difference between 40% equities and 50% equities doesn’t make me feel any “less nauseous” to my overall portfolio drop so I just go with a 50/50 aa.
Thank you, I remember reading this article and feeling good about it, then wondered if it was for retirees in their 60s...that's why I tried to keep to about 40%, which was the highest I could comfortably go. Thus, the struggle.

I think in dollars, not %. The thought of losing 50% stocks in dollars is, yes, nauseating, especially if it's not a quick recovery. Now that interest rates are rising, CDs, treasuries, I Bonds, even HY savings are more attractive. At least I know that I don't want to go 0% stocks. 20% is probably my floor, but 30% is a possible compromise. To be honest...I'd be less jittery if we were not in a mature bull market. :?

Happy2BeFree
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Sat Oct 20, 2018 11:53 am

abc132 wrote:
Sat Oct 20, 2018 10:35 am

I think the core issue may be your fear of losing money. ... Your current asset allocation may be in line with your risk tolerance - if you can make your goal to minimize risk instead of to never lose money. I would recommend taking some time to think about how you view money before making any investment decisions. The transition is from saving and increasing that portfolio to learning how to enjoy spending that money you have accumulated.

You should focus on doing what makes you happy. If part time work eases your fears, or is enjoyable, do it for as long as those things are true. I would decrease the time you spend looking at financial news if that is causing you anxiety.
Thanks, abc132...when I got laid off a few years ago, I had no choice but to begin withdrawing. It was really hard at first, so I tried not paying attention, and that helped. It also helped that the market had done well and continued to, so I never saw much of a dip. PT gigs help, for sure. Lots to consider in the coming days.

prairieman
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by prairieman » Sat Oct 20, 2018 1:19 pm

I can understand the OP because I am similarly not interested in losing money as happened in past downturns. The way I see it, my current conservative AA keeps me financially secure for life as long as something apocalyptic does not occur. I do not need or want more, but I absolutely do not want to transition back to being financially unsound ever again, even if markets tank worse than in 2000 and 2008. I’m not timing the market but do think the US could be facing hard times sometime before I die or get too old to care anymore.

aqan
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by aqan » Sat Oct 20, 2018 2:10 pm

I keep hearing about bond market bubble, so not sure if increasing bond allocation will give much relief either. Unless you’re thinking about CD or T-Bills.

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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Fallible » Sat Oct 20, 2018 3:47 pm

Happy2BeFree wrote:
Fri Oct 19, 2018 10:46 am
...
goingup: I hear you. Not even sure what’s appropriate for me, though, apart from risk tolerance. It’s such a personal decision. ...
Yes, risk tolerance is a uniquely personal decision because it's largely about emotions, about who you are, about knowing who you are. It may be the best example of the "not easy" part of Warren Buffett's quote: "Investing is simple, but it's not easy."

The wiki has a page on "Risk Tolerance" and it includes a reading list of books such as the BH "Guide" (see the chapter on "Emotions") and other books mentioned here. One that provides much good research on the subject is Your Money & Your Brain by WSJ columnist Jason Zweig. I think understanding how our brains work when dealing with money is a key to determining one's correct risk tolerance - at least for awhile since it can change often.

https://www.bogleheads.org/wiki/Risk_tolerance
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Happy2BeFree
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Re: What if your risk tolerance is lower than what's best for your portfolio?

Post by Happy2BeFree » Sat Oct 20, 2018 4:45 pm

Fallible wrote:
Sat Oct 20, 2018 3:47 pm
Happy2BeFree wrote:
Fri Oct 19, 2018 10:46 am
...
goingup: I hear you. Not even sure what’s appropriate for me, though, apart from risk tolerance. It’s such a personal decision. ...
Yes, risk tolerance is a uniquely personal decision because it's largely about emotions, about who you are, about knowing who you are. It may be the best example of the "not easy" part of Warren Buffett's quote: "Investing is simple, but it's not easy."

The wiki has a page on "Risk Tolerance" and it includes a reading list of books such as the BH "Guide" (see the chapter on "Emotions") and other books mentioned here. One that provides much good research on the subject is Your Money & Your Brain by WSJ columnist Jason Zweig. I think understanding how our brains work when dealing with money is a key to determining one's correct risk tolerance - at least for awhile since it can change often.

https://www.bogleheads.org/wiki/Risk_tolerance
Thank you, Fallible, I bought a number of those books several years ago; I think I need a refresher. Since I'm in preservation mode now and we're in a mature bull, it's time to take some off the table when/if the market bounces back a little. I'm not a risk taker, and for me, money = security. But I know I need to take some risks with some of it to keep it growing. The only question is, how much to risk?

You're right...it's definitely NOT EASY! :confused

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