Different risk tolerance in the family

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konik
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Different risk tolerance in the family

Post by konik »

Hi all!

My wife and I have considerably different risk tolerance and while we agree on the general buy and hold philosophy we seem unable to get a portfolio which makes both of us happy. What is your experience and solution for such a situation? Currently we are thinking of maybe splitting our common portfolio into two (virtually) separate ones and manage them according to each preference.
mega317
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Re: Different risk tolerance in the family

Post by mega317 »

If the portfolios experience significantly different returns, are you going to be living different lifestyles? One sits first class the other coach?
It’s probably easier to manage one portfolio with a risk profile between your two preferences. That’s what your plan accomplishes in effect anyway.
If you are unable to be happy this way then you have other problems to figure out first.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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arcticpineapplecorp.
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Re: Different risk tolerance in the family

Post by arcticpineapplecorp. »

that's fine as long as you can obtain your joint objectives. can you?

#1. If so, (and let's assume there are equal amounts invested in the two different allocations/portfolios...the following doesn't work if they're not) then what would be the difference between two portfolios:

one: 80/20
other 20/80

or two portfolios with each 50/50? I.E. you could have:
one: 50/50
other: 50/50

using the following shows as an example of those above 80/20 had 9.4% (in the past, don't assume true for future) and 20/80 had 6.6%, so what's the average of both (assuming equal amounts in each)? 8%, what would come closest to that based on the link below? 50/50 had 8.2% in the past:
https://personal.vanguard.com/us/insigh ... llocations

now it gets a little more complicated if the amount of money in one of your portfolios is greater than the other. And also, there's the potential to get more risky over time, because if she is 80/20 and you are 20/80 and there's equal amounts in each...over time her portfolio will make up a larger percentage overall because her aggressive portfolio will grow more than yours. So, more rebalancing/reducing risk to maintain OVERALL risk profile, right?

#2. Now if you can't obtain your objectives with these different portfolios, the options are:
A. select an allocation that is going to obtain your objectives (this may be more risky than one may want)
B. Work longer
C. Increase contributions
D. Decrease expenses
E. Some combination of A-D.

#3. If you can obtain your objectives with a lower allocation to stocks, then are you taking more risk than you need?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
123
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Re: Different risk tolerance in the family

Post by 123 »

Congratulations on having such a problem. In many cases one spouse is totally uninterested in any aspect of investments and that often leaves one spouse to bear the burden of investment decisions and sometimes the blame when things don't work out.

Virtual portfolios are one solution where you divide up assets and apportion investment capital to each spouse. Such investments can even be held in joint accounts since you each will know whether each investment is "his" or "hers". Of course there is some likelihood that the spouse that prefers more risk will increase risk on "their" share to compensate for the positions of the "safe" partner. However if one parter is 100% fixed income and the other is 100% equity the end result is a 50/50 portfolio which is, in the end, possibly a good compromise.
The closest helping hand is at the end of your own arm.
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Artful Dodger
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Re: Different risk tolerance in the family

Post by Artful Dodger »

A number of years ago I went mostly Boglehead, and switched to index funds with some managed bond an international funds. My wife was more interested in individual stocks, and her rollover IRA was concentrated in individual stocks. We’ve discussed asset allocation and she’s comfortable with me making the lion’s share of investing decisions, and our overall equity allocation Has drifted down to a little below 50%. I’m 65; she’s 67. We’ve trimmed some stocks, but her purchase of Apple, Facebook, and a few others have done quite well.

We have six accounts at Fidelity - a brokerage account which is small money market, my ROTH, my rollover IRA, my 401k, her 401k, and her rollover IRA. The stocks are in her rollover IRA. It might be easier for you you transfer some assets and set up an account that is hers, and let her make the investing decisions for that account.

I’m not sure this addresses your question about different risk tolerance, but I see nothing wrong with the two of you taking different approaches to achieving your long term investing goals. Set a time each year to evaluate your progress.
DoTheMath
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Re: Different risk tolerance in the family

Post by DoTheMath »

konik wrote: Mon Aug 17, 2020 2:48 pm Hi all!

My wife and I have considerably different risk tolerance and while we agree on the general buy and hold philosophy we seem unable to get a portfolio which makes both of us happy. What is your experience and solution for such a situation? Currently we are thinking of maybe splitting our common portfolio into two (virtually) separate ones and manage them according to each preference.
My first instinct is that this is kicking the can down the road and setting yourself up for bigger conflicts in the future. One of you is very likely to do better than the other. It seems hard to not end up with resentment, "I told you so"-itis, and more. What heppens if one if you can afford to retire years earlier than the other? What happens if one of you has their investments drop by half a few years into retirement?

I would work hard to find a middle ground which both of you are comfortable with. If this can be for the entire portfolio, then great.

But I think it would also be fine if, say, 80% is invested in a way you both are okay with and you each have an additional 10% to invest as you wish. That should be enough so that you each feel have some control and be okay with how the other 80% is invested, but not so much that what you choose to do with your investments could completely derail your shared goals.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir
dbr
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Re: Different risk tolerance in the family

Post by dbr »

konik wrote: Mon Aug 17, 2020 2:48 pm Hi all!

My wife and I have considerably different risk tolerance and while we agree on the general buy and hold philosophy we seem unable to get a portfolio which makes both of us happy. What is your experience and solution for such a situation? Currently we are thinking of maybe splitting our common portfolio into two (virtually) separate ones and manage them according to each preference.
Unless you can somehow be married and yet establish completely different separate financial fates for yourselves, this accomplishes nothing.

Usually when people arrive at different preferences for something that can be quantified, such as presumably a stock/bond ratio, the solution is to split the difference.

In the case of risk a solution is to adopt the lowest risk tolerance on the grounds that someone who can tolerate more risk can certainly tolerate less risk. What is at discussion there is the price of foregoing hoped for return.

It is also possible risk itself is not completely understood. Since the essence of willingness to take risk is psychological, it might be worth discussing what the fear is. It could also be that the need and ability to take risk has not been understood as well as it should be. Each person being able to state quantitatively what they expect might help. If the preference is the result of some simple questionnaire I would not count that as an adequate analysis.
stuper1
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Re: Different risk tolerance in the family

Post by stuper1 »

Not meaning to pry unnecessarily, but please consider giving us more details such as what the comfortable stock/bond ratios would look like for you and for your wife. You may be able to get better advice from us if we have a few more details.
000
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Re: Different risk tolerance in the family

Post by 000 »

Just average the two desired portfolios, e.g. 80/20 and 60/40 makes a joint 70/30 portfolio.
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Sufferlandrian
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Re: Different risk tolerance in the family

Post by Sufferlandrian »

That's exactly what I did. Sitting at 70/30 and happy about it.
Learning to fish.
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konik
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Re: Different risk tolerance in the family

Post by konik »

Thank you all for valuable comments!

A couple more details:

1)We have semi-separate budget: we sum up our salaries each month, take a fixed percentage to investment and emergency fund, then split the rest equally. The plan is to use similar scheme during retirement - have equal monthly "salaries", it does not really depends on how the portfolio(s) will behave.

2)The trouble with simply finding middle ground is we have slightly different approaches to asset allocations. My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
BuckyBadger
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Re: Different risk tolerance in the family

Post by BuckyBadger »

konik wrote: Tue Aug 18, 2020 3:08 am Thank you all for valuable comments!

A couple more details:

1)We have semi-separate budget: we sum up our salaries each month, take a fixed percentage to investment and emergency fund, then split the rest equally. The plan is to use similar scheme during retirement - have equal monthly "salaries", it does not really depends on how the portfolio(s) will behave.

2)The trouble with simply finding middle ground is we have slightly different approaches to asset allocations. My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
With this new information i have a new answer.

Do what she wants.
ivk5
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Re: Different risk tolerance in the family

Post by ivk5 »

konik wrote: Tue Aug 18, 2020 3:08 am That all sound quite suspicious for my wife (especially as I'm just learning things)
+1
sailaway
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Re: Different risk tolerance in the family

Post by sailaway »

BuckyBadger wrote: Tue Aug 18, 2020 9:44 am
konik wrote: Tue Aug 18, 2020 3:08 am Thank you all for valuable comments!

A couple more details:

1)We have semi-separate budget: we sum up our salaries each month, take a fixed percentage to investment and emergency fund, then split the rest equally. The plan is to use similar scheme during retirement - have equal monthly "salaries", it does not really depends on how the portfolio(s) will behave.

2)The trouble with simply finding middle ground is we have slightly different approaches to asset allocations. My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
With this new information i have a new answer.

Do what she wants.
It is the way.

And not in a happy wife sense, just that the wife in this case prefers the boglehead approach.


We originally just each managed our own portfolio. Then I foundn out that our higher earner had no bonds. At all. Eventually, we moved to one asset allocation across portfolios. Now our higher earner looks ultra consery because that is where we buy all new bonds. However, we always agreed on the basic approach. Sure, I have some individual stocks from before I had a better grasp on investing, and my partner went crazy when signing up for the HSA ("There were limited options!" "How does limited options result in you choosing 10 different funds?!"), but we have decided to let those relatively small amounts ride while using index funds for everything else.
dbr
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Re: Different risk tolerance in the family

Post by dbr »

konik wrote: Tue Aug 18, 2020 3:08 am
2)The trouble with simply finding middle ground is we have slightly different approaches to asset allocations. My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
What you just wrote is not that you two have a different tolerance for risk but that your wife is afraid you don't know what you are doing and may make some costly mistakes. I have no particular recommendation for how you two might resolve this, but an obvious possibility is for you to forego trying to optimize the portfolio. A compromise might be to set aside a portion for you to play with. Another approach is to somehow show her that there is no special downside risk.
MJS
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Re: Different risk tolerance in the family

Post by MJS »

I have not seen a solid research paper that shows any system doing better than a three fund portfolio over 30-40 years. Traditionally, 5% of the portfolio is dedicated to experimenting, learning, and analytical systems. Keep good data: it is sadly easy to remember the good and forget the bad.
aristotelian
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Re: Different risk tolerance in the family

Post by aristotelian »

Allocate accounts in her name conservatively, allocate accounts in your name aggressively. Overall you should have a diversified portfolio. You can pick up the checks when the market is up, she can pick up the checks when the market is down.
Outer Marker
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Re: Different risk tolerance in the family

Post by Outer Marker »

konik wrote: Tue Aug 18, 2020 3:08 am My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
Your spouse is way ahead of you in terms of bogleheads philosophy. Let her manage your money.
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arcticpineapplecorp.
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Re: Different risk tolerance in the family

Post by arcticpineapplecorp. »

Outer Marker wrote: Tue Aug 18, 2020 11:03 am
konik wrote: Tue Aug 18, 2020 3:08 am My spouse does not wish to dive deep into details and is quite happy with something like 70/30. On the other hand I do like to research investing literature and find satisfaction in optimising portfolio (I do understand that only a small gain over 70/30 could be achieved for similar risk). My current intention is to go risk parity strategy aiming for the risk equal to 70/30 or slightly higher. AA in that allocation maybe would include some gold or EM debt. That all sound quite suspicious for my wife (especially as I'm just learning things)
Your spouse is way ahead of you in terms of bogleheads philosophy. Let her manage your money.
+1
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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konik
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Re: Different risk tolerance in the family

Post by konik »

I think I mixed up things a bit - this is really two different questions: risk tolerance and allocation approach.

I do not want this topic to derail to 2-fund agitation. I do believe in general passive approach and buy and hold strategy but obviously asset allocation IS a subject of discussion which one can prove looking into the most popular topics even in this forum.

If it's less controversial let's say you are a proper Boglehead, your spouse is stock picker - your actions? Subquestion - your actions if you are unable to convince her in your philosophy.
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AlabamaPaul
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Re: Different risk tolerance in the family

Post by AlabamaPaul »

konik wrote: Tue Aug 18, 2020 11:41 am I think I mixed up things a bit - this is really two different questions: risk tolerance and allocation approach.

I do not want this topic to derail to 2-fund agitation. I do believe in general passive approach and buy and hold strategy but obviously asset allocation IS a subject of discussion which one can prove looking into the most popular topics even in this forum.

If it's less controversial let's say you are a proper Boglehead, your spouse is stock picker - your actions? Subquestion - your actions if you are unable to convince her in your philosophy.
Is it possible to agree on a core strategy and asset allocation? If so, then let each invest the "extra" as desired...
BuckyBadger
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Re: Different risk tolerance in the family

Post by BuckyBadger »

konik wrote: Tue Aug 18, 2020 11:41 am I think I mixed up things a bit - this is really two different questions: risk tolerance and allocation approach.

I do not want this topic to derail to 2-fund agitation. I do believe in general passive approach and buy and hold strategy but obviously asset allocation IS a subject of discussion which one can prove looking into the most popular topics even in this forum.

If it's less controversial let's say you are a proper Boglehead, your spouse is stock picker - your actions? Subquestion - your actions if you are unable to convince her in your philosophy.
The Personal Finance forum is for your own personal finance. In your personal case, you should do what she wants to do. Pick an appropriate AA. Don't "research" anything. Don't "optimize" anything.

If you want to make a theoretical question you'll should probably start a new thread in the investing theory forum.
Broken Man 1999
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Re: Different risk tolerance in the family

Post by Broken Man 1999 »

DW has little to no interest in my/her portfolio.

When we were working at MegaCorp, and her subsequent company, I set up her 401k plans.

After we rolled everything to Vanguard, I set up our TIRAs and also our Roths with the same AA. Our AA's are the same today, same investments except some individual stocks I hold.

I had told her from the beginning that I would manage her accounts the same way I managed mine. Though, I have never bought individual stocks in her accounts. Our ages are within one month of each other, so no worries there. Same investments, different dollar amounts.

The money I gained from individual stocks in any taxable account was spent on home projects. Stock gains in my tax-deferred accounts are reinvested in index funds/ETFs, or used for home projects. So, I hold the risk, but both of us benefit from my individual stocks sooner or later.

OP, since it is clear you have an interest that your spouse does not share, leave her account as she desires, and play all you want in yours.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
BuckyBadger
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Re: Different risk tolerance in the family

Post by BuckyBadger »

Broken Man 1999 wrote: Tue Aug 18, 2020 12:36 pm OP, since it is clear you have an interest that your spouse does not share, leave her account as she desires, and play all you want in yours.
The problem with this, and indeed with all spouses with separate finances, is what happens when it's time to retire? If her portfolio has grown due to her hand-off boglehead approach and his has tanked, does she retire without him? Does she fly business class and he take a greyhound? Does she pick him up at McDonalds after having herself a great dinner at a tremendous steakhouse?

Separate accounts sound fine, but what happens when it's time to draw from them? Are they still "his" and "hers?" If so, then he's punishing her.
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Re: Different risk tolerance in the family

Post by Broken Man 1999 »

BuckyBadger wrote: Tue Aug 18, 2020 12:54 pm
Broken Man 1999 wrote: Tue Aug 18, 2020 12:36 pm OP, since it is clear you have an interest that your spouse does not share, leave her account as she desires, and play all you want in yours.
The problem with this, and indeed with all spouses with separate finances, is what happens when it's time to retire? If her portfolio has grown due to her hand-off boglehead approach and his has tanked, does she retire without him? Does she fly business class and he take a greyhound? Does she pick him up at McDonalds after having herself a great dinner at a tremendous steakhouse?

Separate accounts sound fine, but what happens when it's time to draw from them? Are they still "his" and "hers?" If so, then he's punishing her.
Well, by their nature IRAs are individual. I have $4 to DW's $1. She has the same standard of living as I do. At the end of the day, in some form or fashion, IRA distributions become joint funds to support joint retirement.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
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Re: Different risk tolerance in the family

Post by Dale_G »

konik, you are regarding the taxable account and probably all of the tax free/deferred accounts as "our money", and apparently plan to continue this in the future. Absolutely fine.

In that case, the solution is to set up individual taxable accounts and transfer the most conservative investments into your wife's account and the riskier ones into your own. Be sure to transfer - and not sell then buy, in order to eliminate any tax consequences.

Since you regard it as "our money" it won't matter if there is a difference in performance. You will be happy if you do well, and in a bumpy market your wife will be happy that she is doing relatively better.

Since the early 80's I have maintained separate taxable accounts for my wife and I, even though I was the sole earner. I did so mostly for asset protection, but also to assure her that it was all "our money".

It will take a little work to set up the individual accounts, but it should be a satisfactory solution.

Dale
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BuckyBadger
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Re: Different risk tolerance in the family

Post by BuckyBadger »

Broken Man 1999 wrote: Tue Aug 18, 2020 1:23 pm
BuckyBadger wrote: Tue Aug 18, 2020 12:54 pm
Broken Man 1999 wrote: Tue Aug 18, 2020 12:36 pm OP, since it is clear you have an interest that your spouse does not share, leave her account as she desires, and play all you want in yours.
The problem with this, and indeed with all spouses with separate finances, is what happens when it's time to retire? If her portfolio has grown due to her hand-off boglehead approach and his has tanked, does she retire without him? Does she fly business class and he take a greyhound? Does she pick him up at McDonalds after having herself a great dinner at a tremendous steakhouse?

Separate accounts sound fine, but what happens when it's time to draw from them? Are they still "his" and "hers?" If so, then he's punishing her.
Well, by their nature IRAs are individual. I have $4 to DW's $1. She has the same standard of living as I do. At the end of the day, in some form or fashion, IRA distributions become joint funds to support joint retirement.

Broken Man 1999
Of course IRAs are individual. But the entire retirement portfolio should be considered as a whole. My husband's 401k is 100 percent bonds because that was the best fund available. That doesn't mean "his" AA is 100 percent bonds, because we look at the overall portfolio.

If both spouses will retire using the same pool of money, splitting it into his and hers portfolios is pointless and inefficient.
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celia
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Re: Different risk tolerance in the family

Post by celia »

My suggestion for the OP is to have his wife manage 90% of the assets and let you research and "play" with 10% (or whatever amount you both agree on). It sounds like learning about investing and individual holdings is your interest/hobby and maybe you'll make a little more than average or a little less.

Another way of looking at this is if you both work and each have some discretionary money, you could decide to put your share into your "fun" account while maybe she puts her discretionary share into things she wants (non-investment-wise). We sort of did this as I would ask DH each year how much he wanted to contribute to a Roth. Some years, he didn't want to contribute anything, so I had a separate account at another brokerage with a Roth that I contributed to in the years he wouldn't be contributing. I look at this Roth as my "fun money" and do what I want with it. That's ok with him. But as we get older (in our 70s), I am now configuring things to be easy for him to maintain in case he survives me or I am unable to maintain our accounts.
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Re: Different risk tolerance in the family

Post by Broken Man 1999 »

BuckyBadger wrote: Tue Aug 18, 2020 4:33 pm
Broken Man 1999 wrote: Tue Aug 18, 2020 1:23 pm
BuckyBadger wrote: Tue Aug 18, 2020 12:54 pm
Broken Man 1999 wrote: Tue Aug 18, 2020 12:36 pm OP, since it is clear you have an interest that your spouse does not share, leave her account as she desires, and play all you want in yours.
The problem with this, and indeed with all spouses with separate finances, is what happens when it's time to retire? If her portfolio has grown due to her hand-off boglehead approach and his has tanked, does she retire without him? Does she fly business class and he take a greyhound? Does she pick him up at McDonalds after having herself a great dinner at a tremendous steakhouse?

Separate accounts sound fine, but what happens when it's time to draw from them? Are they still "his" and "hers?" If so, then he's punishing her.
Well, by their nature IRAs are individual. I have $4 to DW's $1. She has the same standard of living as I do. At the end of the day, in some form or fashion, IRA distributions become joint funds to support joint retirement.

Broken Man 1999
Of course IRAs are individual. But the entire retirement portfolio should be considered as a whole. My husband's 401k is 100 percent bonds because that was the best fund available. That doesn't mean "his" AA is 100 percent bonds, because we look at the overall portfolio.

If both spouses will retire using the same pool of money, splitting it into his and hers portfolios is pointless and inefficient.
When does it become impossible to look at different accounts overall just because they have different investments? Each person might have something different, that doesn't mean you have no idea what the accounts hold. In fact, you have differences, no?

A couple doesn't have to be in lock-step with their investments to have a portfolio that is looked at as a whole.

I don't see a lot of difference in OP's looking at different investments than someone who might invest 5% in individual stocks. I don't get the feeling he is going to abandon index funds and go whole hog into something else.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
dbr
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Re: Different risk tolerance in the family

Post by dbr »

konik wrote: Tue Aug 18, 2020 11:41 am I think I mixed up things a bit - this is really two different questions: risk tolerance and allocation approach.

I do not want this topic to derail to 2-fund agitation. I do believe in general passive approach and buy and hold strategy but obviously asset allocation IS a subject of discussion which one can prove looking into the most popular topics even in this forum.

If it's less controversial let's say you are a proper Boglehead, your spouse is stock picker - your actions? Subquestion - your actions if you are unable to convince her in your philosophy.
First action is to discuss the issue.

Second action is most likely to let it go. Life and a marriage are more important than how investments are managed. That said, they say the leading cause of divorce is financial problems and disagreements.
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