Does larger portfolio make one more or less risk tolerant

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InvestingGeek
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Does larger portfolio make one more or less risk tolerant

Post by InvestingGeek » Fri May 22, 2020 8:46 pm

I'm wondering how most people here direct their portfolio as they enter middle age.

If someone has accumulated the holy grail of 25 times their annual expenses, but still has 20 odd years to retirement, should they stop playing or play even more given the ability to take on more risk?
Should they move the asset allocation slider to preservation as they glide to retirement? Or does the fact that the portfolio is larger mean they can afford to let it ride the market since they are theoretically better equipped to deal with dips or even longer downturns?

stan1
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Re: Does larger portfolio make one more or less risk tolerant

Post by stan1 » Fri May 22, 2020 8:53 pm

You get to choose.

You are able to take more risk and want to invest accordingly, or you can choose not to take much risk because you don't need to.

Or, put another way, you can decide to invest aggressively for your heirs (family or charity) or conservatively for yourself.

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Re: Does larger portfolio make one more or less risk tolerant

Post by annu » Fri May 22, 2020 8:59 pm

Well, it is the glass half empty or full kind of situation.

1)John D. Rockefeller, an Ohio native, started Standard Oil. Rockefeller was at one point the world’s richest man and first ever American billionaire. Considering he was a billionaire in the early 1900’s he is still considered as the richest person in modern history.

When a reporter asked him, “How much money is enough?” He responded, “Just a little bit more.”


2) My gramps, barely had enough for the day, forget retire, but was the most content person I have ever met in my life, he did FIRE before FIRE was a thing, not because he had enough, but because he was content.

So all depends person to person, I guess, no universal rule or limit.

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Re: Does larger portfolio make one more or less risk tolerant

Post by arcticpineapplecorp. » Fri May 22, 2020 8:59 pm

this was a question I saw early on after joining bogleheads and I found it immensely interesting because there is no right answer in and of itself. Some will obviously say if you've won the game stop playing. But others have said, if you've won the game, while you don't have to play anymore, that doesn't mean you have to stop.

The example in that discussion was someone who would have more than they needed. One person said obviously take less risk. No need, right?

But another said, if it's more than you need, then presumably you're leaving it (or whatever's left over when you die) to someone else (family, charity, etc).

It is easily argued that since that portion you leave to others is not yours, then you should manage it according to the other's risk tolerance. Or you could look at maximizing it for the others' sake, not for your sake. That argues for taking more risk, not less, to maximize the benefit for another.

both arguments are valid. This is what makes it "personal" finance.

(posted this while stan1 was posting. He said it better than I did).
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Re: Does larger portfolio make one more or less risk tolerant

Post by WolfgangPauli » Fri May 22, 2020 9:18 pm

InvestingGeek wrote:
Fri May 22, 2020 8:46 pm
I'm wondering how most people here direct their portfolio as they enter middle age.

If someone has accumulated the holy grail of 25 times their annual expenses, but still has 20 odd years to retirement, should they stop playing or play even more given the ability to take on more risk?
Should they move the asset allocation slider to preservation as they glide to retirement? Or does the fact that the portfolio is larger mean they can afford to let it ride the market since they are theoretically better equipped to deal with dips or even longer downturns?
The infamous answer "it depends" likely applies here. If you feel you are on track to continue adding to the portfolio then I may leave it alone but be a bit more conservative with new money which is being added. That is what I was able to do. Which, over time, made the portfolio less risky to a downturn without having to sell anything.

You have 20 years to go so you likely are fairly young. Have all of the "big expenses" been taken care of (No mortgage, kids fully financed for college and maybe graduate school etc.)? On thing that makes this hard to understand is you have posted just one side of the ledger. Would be good to know the other.
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Re: Does larger portfolio make one more or less risk tolerant

Post by grabiner » Fri May 22, 2020 9:34 pm

InvestingGeek wrote:
Fri May 22, 2020 8:46 pm
I'm wondering how most people here direct their portfolio as they enter middle age.

If someone has accumulated the holy grail of 25 times their annual expenses, but still has 20 odd years to retirement, should they stop playing or play even more given the ability to take on more risk?
Should they move the asset allocation slider to preservation as they glide to retirement? Or does the fact that the portfolio is larger mean they can afford to let it ride the market since they are theoretically better equipped to deal with dips or even longer downturns?
You have the option of going either way. Once you have more than enough to retire on, if you want to keep working, you can invest conservatively and plan to increase your retirement standard of living (owning two homes, or a retirement home in an expensive area, or traveling). Alternatively, you could invest based on a longer time horizon, intending to use the money for your children's retirement, your not-yet-born grandchildren's college, or your preferred charities.

The question posed in your subject line is relevant to investors who have larger portfolios but have not yet accumulated enough to retire. In that situation, your risk tolerance decreases as your portfolio gets larger. If you are a long way from retirement and you have only saved 1/4 of what you need, then a 40% portfolio decline reduces your retirement income by 10%, or requires you to work longer to make up that 10% and get back the same standard of living. If you are close to retirement and you have saved 3/4 of what you need, then a 13% portfolio decline reduces your retirement income by 10%. (Target-date funds decrease stock allocations as you get older, under the assumption that your investment portfolio will get larger over time.)
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InvestingGeek
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Re: Does larger portfolio make one more or less risk tolerant

Post by InvestingGeek » Fri May 22, 2020 10:01 pm

WolfgangPauli wrote:
Fri May 22, 2020 9:18 pm
You have 20 years to go so you likely are fairly young. Have all of the "big expenses" been taken care of (No mortgage, kids fully financed for college and maybe graduate school etc.)? On thing that makes this hard to understand is you have posted just one side of the ledger. Would be good to know the other.
I haven't been lucky enough to get to this state yet.

My question stemmed from books I've been reading (Bernstein's Rational Expectations being the latest) that consistently make the claim that as human capital decreases, one should invariably take on less risk, regardless of the accumulated amount. I kept thinking that the amount accumulated should make a difference and wanted to know what the collective thinking was on this.

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Re: Does larger portfolio make one more or less risk tolerant

Post by rbaldini » Fri May 22, 2020 10:07 pm

More wealth make you more risk tolerant. You can literally tolerate more loss without going broke.

On the other hand, you have less need to take risk. So you might elect to invest more conservatively anyway.

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Re: Does larger portfolio make one more or less risk tolerant

Post by StormShadow » Fri May 22, 2020 10:18 pm

rbaldini wrote:
Fri May 22, 2020 10:07 pm
More wealth make you more risk tolerant.
You would think that would be true. But my personal observation is that the opposite ends up being practiced.

Folks with a relatively small net worth tend to make incredibly risky bets. Buying individual stocks, penny stocks even. They’re spending a greater percent of their paychecks on lottery tickets.

People with quite sizeable net worths (particularly if the vast majority of net worth was obtained directly from job earnings savings rather than investments) tend to be more conservative when it comes to asset allocation (risk tolerance).

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Re: Does larger portfolio make one more or less risk tolerant

Post by PowderDay9 » Sat May 23, 2020 2:36 am

annu wrote:
Fri May 22, 2020 8:59 pm
Well, it is the glass half empty or full kind of situation.

1)John D. Rockefeller, an Ohio native, started Standard Oil. Rockefeller was at one point the world’s richest man and first ever American billionaire. Considering he was a billionaire in the early 1900’s he is still considered as the richest person in modern history.
Reminds me of one of my favorite articles. Maybe I'm a glass half full guy. I view wealth not in comparison to others but as a society in general across history.

https://fee.org/articles/you-are-richer ... ckefeller/

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Re: Does larger portfolio make one more or less risk tolerant

Post by cinghiale » Sat May 23, 2020 2:58 am

What StormShadow wrote ^^^^^^^^

This is as much a behavioral issue as it is a financial calculation. Now in retirement and with “enough,” I see no reason to take risks. Our portfolio embraces Rick Ferri’s sweet spot of 30% stocks, 70% bonds. We may miss out on some of the gains that a higher allocation to stocks would deliver over the long-term, but such gains aren’t worth the risk. Age plays into this. The “long term” may well be longer than how much longer I have, and is highly likely to be longer than how many vital and energetic years of life I have remaining. These are the years to explore and enjoy, not to be needlessly absorbed in tweaking a portfolio.

As so many other posters here have said, it’s a personal decision. Just know what your risk levels and life priorities are.
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Re: Does larger portfolio make one more or less risk tolerant

Post by Noobvestor » Sat May 23, 2020 3:30 am

If I got to the point where I felt like I could fully cover my future expenses comfortably, I'd absolutely put additional funds into higher risk, higher return assets. Some have advocated doing so for charity or future generations, which are good reasons. But my reason is simply: why not? If I've got the bases covered, I can go high-risk with the rest - if I decide to donate it, great. If I had a midlife crisis and want a jet, fine too. There's a middle ground where one can be unsure if they've really got the basics covered - maybe most of the 7-figure range - but 8 figures, why not?
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Re: Does larger portfolio make one more or less risk tolerant

Post by Derpalator » Sat May 23, 2020 3:45 am

PowderDay9 wrote:
Sat May 23, 2020 2:36 am
annu wrote:
Fri May 22, 2020 8:59 pm
Well, it is the glass half empty or full kind of situation.

1)John D. Rockefeller, an Ohio native, started Standard Oil. Rockefeller was at one point the world’s richest man and first ever American billionaire. Considering he was a billionaire in the early 1900’s he is still considered as the richest person in modern history.
Reminds me of one of my favorite articles. Maybe I'm a glass half full guy. I view wealth not in comparison to others but as a society in general across history.

https://fee.org/articles/you-are-richer ... ckefeller/
Thanks for the link, it's a keeper!

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Re: Does larger portfolio make one more or less risk tolerant

Post by nisiprius » Sat May 23, 2020 5:45 am

You have to determine your risk tolerance for yourself. You don't look it up in a table, you don't ask someone else what it "should" be.

A term for what you are asking about is "relative risk aversion." Someone with increasing relative risk aversion says "I've won the game, why should I keep playing?" Decreasing relative risk aversion says "now I can afford to take more risks, so why shouldn't I?" Neither is objectively correct.

When I've seen financial economics equations with risk aversion in them, risk aversion was an input. It was information you are supposed to have gotten, from something other than dollar numbers, before you started working through the equation.

The question you are asking is whether people "should" have increasing relative risk aversion or decreasing relative risk aversion. The answer is that there is no "should." It is personal. There is no more "should" to it than "should people marry people who are similar to themselves or different from themselves?"

In a rough general sort of way, it is a common observation that several things often go together. Over time, people get older. Their portfolio gets bigger. They have "more to lose," not so much in the sense of net worth, but in the sense of things that are important to them that they want to protect. One objective dollar-related factor is that they see fewer earnings years ahead of you and lowered ability to recover from losses. Thus it is common to observe an association between age, and larger portfolio size, and decreasing risk tolerance.

Why do people think that there is a "should" about risk tolerance? One reason is that it is natural for people to see their own preferences as objectively right or wrong, and project them onto others. I prefer a Mac, therefore Macs are objectively better, therefore you "should" be using a Mac... not.

Another reason is that people are trying to sell you things. If someone is trying to sell you something that is risky, and you are showing sales resistance because you feel uncomfortable with the degree of risk, two strategies that they have at their disposal are to say that it is not as risky as you think, and to say that you "should" be more risk-tolerant than you think are. This is like an experience I once had in a clothing store, with a guy who kept telling me that I "should" like to wear a subtly pink dress shirt instead of white, and that I was wrong not to like them. (For the record: I bought the pink dress shirt. And never wore it, because I didn't like it.)

Risk tolerance questionnaires, of the kind brokerages make available or ask you to take, are of some limited use, but only limited. I am convinced that their purposes is not to help you, but to keep the brokerage out of trouble by putting you on record as saying you can tolerate some risk so they won't get in trouble for selling you unsuitable investments.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Does larger portfolio make one more or less risk tolerant

Post by Sandtrap » Sat May 23, 2020 9:36 am

Less risk tolerant.
The larger ones portfolio|net worth/assets......
.....The more one has to lose than to gain by taking risk.

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Re: Does larger portfolio make one more or less risk tolerant

Post by J295 » Sat May 23, 2020 9:49 am

Personally less risk upon transition from full time work at 53.
Have enough.

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Re: Does larger portfolio make one more or less risk tolerant

Post by Fat Tails » Sun May 24, 2020 2:42 am

If there was some chance of a big market decline derailing your retirement plans, then I think one should be less risk tolerant in the early years of retirement, to get past the sequence-of-return danger zone. Then at age 70 or later, you would become more risk tolerant, using your beneficiaries time horizon as the risk determinant, while likely giving away some the (future) inheritance early.

If there was no chance of a bug market decline affecting retirement, then take more risk by having a higher stock allocation.

At least that is what I would do. :D

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Re: Does larger portfolio make one more or less risk tolerant

Post by rossington » Sun May 24, 2020 3:19 am

As one can tell from the sampling of posts above, it depends on the individual. The infinite psychology of investing NEVER changes.
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Re: Does larger portfolio make one more or less risk tolerant

Post by Dandy » Sun May 24, 2020 7:55 am

A moderate allocation will still likely growth that 25 x expense asset dramatically over 20 years. If you add your contributions even more. So, what is the goal for the extra assets/risk for having a more aggressive allocation? You might want to look to how to enjoy life a bit more now rather than striving for a much greater asset base at retirement.

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Re: Does larger portfolio make one more or less risk tolerant

Post by jajlrajrf » Sun May 24, 2020 7:59 am

I agree with those who have said it's largely a behavioral issue. For me personally, I'd say that having reached my targets allows me to take the amount of risk I always wanted, when before that point I was less comfortable with taking that risk - i wanted the returns, but taking the potential loss that came with them wasn't viable. Now it is.

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Re: Does larger portfolio make one more or less risk tolerant

Post by flaccidsteele » Sun May 24, 2020 11:24 am

InvestingGeek wrote:
Fri May 22, 2020 8:46 pm
I'm wondering how most people here direct their portfolio as they enter middle age.

If someone has accumulated the holy grail of 25 times their annual expenses, but still has 20 odd years to retirement, should they stop playing or play even more given the ability to take on more risk?
Should they move the asset allocation slider to preservation as they glide to retirement? Or does the fact that the portfolio is larger mean they can afford to let it ride the market since they are theoretically better equipped to deal with dips or even longer downturns?
I won the game in my 40s

I took risk when I was in my 20s because I had nothing to lose

I take risk now because the larger portfolio means I’m insulated from long market downturns

I still play because I enjoy it

Impossible to resist buying more when the market tanks
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

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Re: Does larger portfolio make one more or less risk tolerant

Post by ram » Sun May 24, 2020 11:42 am

Noobvestor wrote:
Sat May 23, 2020 3:30 am
If I got to the point where I felt like I could fully cover my future expenses comfortably, I'd absolutely put additional funds into higher risk, higher return assets. Some have advocated doing so for charity or future generations, which are good reasons. But my reason is simply: why not? If I've got the bases covered, I can go high-risk with the rest - if I decide to donate it, great. If I had a midlife crisis and want a jet, fine too. There's a middle ground where one can be unsure if they've really got the basics covered - maybe most of the 7-figure range - but 8 figures, why not?
Agree.
My own money is invested 70:30 at this time.

My Fidelity Charitable DAF is invested at a 94:6 ratio as I intend to actually donate only 6% of it this year.
Ram

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Re: Does larger portfolio make one more or less risk tolerant

Post by FrankTheViking » Sun May 24, 2020 11:54 am

When I approach retirement I plan on moving enough of portfolio to bonds for 5 years of living expenses. Whether that will be 1% or 20% of portfolio will not be part of the consideration. (I say that now, hoping the future keeps me an honest man)
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Re: Does larger portfolio make one more or less risk tolerant

Post by Fallible » Sun May 24, 2020 1:47 pm

arcticpineapplecorp. wrote:
Fri May 22, 2020 8:59 pm
this was a question I saw early on after joining bogleheads and I found it immensely interesting because there is no right answer in and of itself. Some will obviously say if you've won the game stop playing. But others have said, if you've won the game, while you don't have to play anymore, that doesn't mean you have to stop.

The example in that discussion was someone who would have more than they needed. One person said obviously take less risk. No need, right?

But another said, if it's more than you need, then presumably you're leaving it (or whatever's left over when you die) to someone else (family, charity, etc).

It is easily argued that since that portion you leave to others is not yours, then you should manage it according to the other's risk tolerance. Or you could look at maximizing it for the others' sake, not for your sake. That argues for taking more risk, not less, to maximize the benefit for another.

both arguments are valid. This is what makes it "personal" finance.

(posted this while stan1 was posting. He said it better than I did).
Both you and stan1 said it equally and quite well. :sharebeer
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Re: Does larger portfolio make one more or less risk tolerant

Post by VaR » Sun May 24, 2020 2:24 pm

For me, being right on the cusp of "winning" doesn't actually change my risk tolerance. I mean, I've currently only "won" if I assume a 4% withdrawal rate, which isn't sufficiently conservative an assumption, IMHO.

If I ask myself, what should I do? I get the answer to "continue with your current strategy." How long should I continue this strategy? Until I get to 3.5%? 3% 2.5%? Perhaps until the probability of failure of the portfolio given 10,000 simulations and an expected lifespan of 114 years is 0?

I think it's worth exploring what strategy actually reduces the probability of failure of the portfolio. Does tilting the portfolio more to lower-volatility, lower return fixed income actually lower the probability of failure or does it increase it?

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Re: Does larger portfolio make one more or less risk tolerant

Post by am » Sun May 24, 2020 2:40 pm

My goal is not to get rich but to have enough and not be poor. Especially when I can’t work and have no income. So I would think being more conservative is more prudent. That is what I plan on when I get to my number.

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