How do you find your risk level?

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Gort
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How do you find your risk level?

Post by Gort » Mon Apr 25, 2011 11:36 am

Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort

zotty
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Re: How do you find your risk level?

Post by zotty » Mon Apr 25, 2011 11:51 am

Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort
If i had enough already, and was sure that i had enough, i was would be 30/70 (stocks/bonds) or even 20/80. If I don't need the risk, i'm not going to take the risk.

SP-diceman
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Post by SP-diceman » Mon Apr 25, 2011 12:01 pm

Most “rules of thumb” apply to those who still must work.
(or have not saved enough)

Obviously, if you have enough, it becomes more about not taking unnecessary risks.



Thanks
SP-diceman

norm
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Post by norm » Mon Apr 25, 2011 12:07 pm

Take a big loss and then decide what AA would let you sleep at night.

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Re: How do you find your risk level?

Post by YDNAL » Mon Apr 25, 2011 12:17 pm

Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours?
Gort,

We are likely a-typical since our plan for investable assets is based on a Dollar Amount in Fixed Income. The Equities are what they are.
Gort wrote: I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
1) Say you go into retirement with $3M needing $120K in withdrawals. This may call for a more conventional approach and AA.

2) Now, say you have $6M.
- $4M in Bonds with a nice dose of TIPS.
- $2M invested for others (heirs, charity, etc) at 100% Stocks (edit).
- Overall AA is 33/67.

3) Does it matter that it is 33/67? What if over the next 5 years the Stocks double in value... does it matter it is now 43/57?
Last edited by YDNAL on Mon Apr 25, 2011 1:17 pm, edited 2 times in total.
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tadamsmar
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Post by tadamsmar » Mon Apr 25, 2011 12:19 pm

I started DYI investing in 2000. I started at about 70/30 stocks/bonds but moved to 60/40 and found I slept better.

Adjusting based on the sleep test works well when the market is high.

But, it's almost always best to stick it out and not sell down stocsk if we have a downturn or crash.
Last edited by tadamsmar on Mon Apr 25, 2011 12:19 pm, edited 1 time in total.

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Re: How do you find your risk level?

Post by nisiprius » Mon Apr 25, 2011 12:19 pm

Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort
If you're 58 and think you can retire in a couple of years, didn't you had a substantial amount invested during the 2008-2009 crash? Or not? If you did, what was your stock allocation? Expressed in percentages, how did your portfolio size compare in March of 2009 to the start of 2008?

Think back as best you can, remember that at the time you did not know it was a temporary loss. Remember that you had heard news stories about the collapse or near-collapse of Countrywide, Bear Stearns, Indymac, Merrill Lynch, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, WaMu, and Citigroup.

How did you feel then? What did you do then? How close were you to saying "I simply cannot afford to lose any more, I'm going to sell so that I can at least keep what I have?"
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: How do you find your risk level?

Post by Erwin » Mon Apr 25, 2011 12:19 pm

zotty wrote:
Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort
If i had enough already, and was sure that i had enough, i was would be 30/70 (stocks/bonds) or even 20/80. If I don't need the risk, i'm not going to take the risk.
Very wise!!!
Erwin

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Re: How do you find your risk level?

Post by Noobvestor » Mon Apr 25, 2011 12:40 pm

mpt follower wrote:
zotty wrote:
Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort
If i had enough already, and was sure that i had enough, i was would be 30/70 (stocks/bonds) or even 20/80. If I don't need the risk, i'm not going to take the risk.
Very wise!!!
Yup. Basically go to bonds entirely, save having enough equities that it actually reduces risks by giving you diversification. The numbers I've heard quoted to accomplish that are in the 20-25% range.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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G12
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Post by G12 » Mon Apr 25, 2011 1:00 pm

I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
I will be 48 in about 50-days and have enough to ER. Greatly benefitted from increasing equity exposure in 2009, but have sold down to 25%, plus another 10% in directly owned commercial and residential RE, and the rest is bonds/cash + a big bag of silver. Why take more risk than you have to and end up working longer if a negative outcome occurs?

yobria
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Re: How do you find your risk level?

Post by yobria » Mon Apr 25, 2011 1:10 pm

zotty wrote:If i had enough already, and was sure that i had enough, i was would be 30/70 (stocks/bonds) or even 20/80. If I don't need the risk, i'm not going to take the risk.
Most people who say they have "enough" mean enough at a 4% or so w/d rate, which requires a healthy amount of stocks if it's going to last 30-40 years.

Nick

matt
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Post by matt » Mon Apr 25, 2011 1:23 pm

You find it on the way down.

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Post by hsv_climber » Mon Apr 25, 2011 1:30 pm

Take the maximum amount of loses that you think you can handle and multiply by square root of PI.

Max. Amount of Loses * (PI^1/2).

zotty
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Post by zotty » Mon Apr 25, 2011 1:38 pm

Too many snarky comments for a serious question. It's disappointing.

Maybe i'm the minority, but i just don't think it's funny at all. People need some help and there is really nowhere else to go where they can get reasonable advice for free or otherwise. it's a shame that this service to others has to get tainted insults along the way.

I remember why i stopped posting for a while.

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ruralavalon
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Post by ruralavalon » Mon Apr 25, 2011 1:40 pm

At age 65, we are 50/48/2 equity/bond/cash.

This seems to be typical here, with equity = 115 minus age.

"The linear regression line which fits the 2007 Diehards data says % stocks = 114 - Age. " http://www.bogleheads.org/forum/viewtop ... 950#988950 .
Gort wrote:I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so.
Applying that formula to you produces about the same result as the 40% from the Vanguard questionaire, i.e. 115 - 58 = 57 equity/43 fixed.
Last edited by ruralavalon on Mon Apr 25, 2011 4:08 pm, edited 1 time in total.
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Post by bargainhuntingking » Mon Apr 25, 2011 1:50 pm

I found mine in Oct 2008 during the crash.

Prior, I was age -10 or -15 in bonds, then realized that age in bonds made me feel much better. I just couldn't stomach the very real thought of losing half of the equity portion of my hard earned retirement savings in a week without more fixed assets there as a buffer.

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Post by Yeti » Mon Apr 25, 2011 1:53 pm

zotty wrote:Too many snarky comments for a serious question. It's disappointing.

Maybe i'm the minority, but i just don't think it's funny at all. People need some help and there is really nowhere else to go where they can get reasonable advice for free or otherwise. it's a shame that this service to others has to get tainted insults along the way.

I remember why i stopped posting for a while.
??? Not sure where that came from, but I think the majority of the comments posted so far have been helpful.

I'd say you don't know for sure how you are going to react until a big drop happens and you say, "okay, I need to tone down my stock allocation a bit because that was rough."

A good starting point would be age in bonds or I like the Pi idea also =)

mike_slc
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Post by mike_slc » Mon Apr 25, 2011 1:58 pm

Half the time you should feel like you have too much stocks, and the other half you should feel like you don't have enough.

matt
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Post by matt » Mon Apr 25, 2011 1:59 pm

zotty wrote:Too many snarky comments for a serious question. It's disappointing.

Maybe i'm the minority, but i just don't think it's funny at all. People need some help and there is really nowhere else to go where they can get reasonable advice for free or otherwise. it's a shame that this service to others has to get tainted insults along the way.

I remember why i stopped posting for a while.
My answer is absolutely serious. There is no way to calculate your risk tolerance. The various equations offered are not that useful. Your risk tolerance ultimately depends not on how much you might lose, but how much confidence you have in your investment strategy going forward. Looking back on 2008, if you had asked me before the financial crisis what my "max loss tolerance" was, I would have told you I don't know. Since I never got there, I still don't know. It is something that you truly don't know until you get there.

And it is situational. For example, I was amazed at how members of a certain political party went from mere displeasure with the economic situation to all out panic when a certain president took office, even though little had fundamentally changed. They switched from "I believe in America and will buy stocks all the way down" to "America is doomed and stocks can only go further down". Do you think if you had asked them a year before that, they would have predicted how they'd respond? I assure you that none of them planned to reach their breaking point near the market bottom. Nonetheless, some of them did.

zotty
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Post by zotty » Mon Apr 25, 2011 2:00 pm

Hey Yeti,
Fair enough. I was just thinking "you'll know after your portfolio crashes" might be a little late for someone looking to retire in 2 years.

Granted, I learned that way, and maybe we all have to learn that way, but maybe the OPs can learn something from our mistakes.

With that... I apologize for my snarky comment about too many snarky comments.

Cheers

zotty
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Post by zotty » Mon Apr 25, 2011 2:03 pm

matt wrote: My answer is absolutely serious.
Sorry about that. Thanks for the insightful follow up.

ResNullius
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Post by ResNullius » Mon Apr 25, 2011 2:35 pm

When I realized that our portfolio had lost about 40% of it's total net asset value due to Wall Street's fraud and gamesmanship. I realized that the system was broken and that individual investors didn't have a chance, other than by posturing their portfolios so as protect at least a little from such stuff. As the market recovered, I moved slowly from a 70% equity portfolio to a 70% fixed portfolio. I realize that all allocations and selections have potential problems, but short and intermediate bond funds seem to me to be safe and reasonably productive. Anyway, when I realized that we had lost so much ground, I realized that I had hit my risk wall.

efmoody
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Risk of loss

Post by efmoody » Mon Apr 25, 2011 3:35 pm

Yes you do know what you can potentially lose. Take the percentage of SD for each allocation of stock and bonds. Figure how long you are going to hold this. Take the SD and divide it by the square root of the number of years to be held.

Risk of loss is 1 mnus the number above to the power of the number of years. That equals the possible loss given just a one standard deviation movement.

More simply, if the economy tanks, figure you will lose from 30% to 70% of your total assets.

The inverted yield curve is a 100% indicator of recessions where 40%+ average is lost. When you see this curve or similar, you DCA down. Your losses should not exceed 20% max. Less if bonds holdings were significant

As for bonds right now- the probability is about 85% that the next decade or TWO could show losses due to real or perceived increases in inflation.

this was a very short lesson. Lots more obviously involved. Also mandatory to read Bernstein's Capital Ideas and Mandlebrot's The (Mis)behavior of Markets. Also must have financial calculator. No FC? Then you cannot determine risk of loss for your own allocation. If FC, you do a mix back and forth to see what the loss exposure might be and what you can supposedly live with. That is if you simply held the allocation. The idea is to adjust risk as correlations move to 1.0.

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Re: How do you find your risk level?

Post by HomerJ » Mon Apr 25, 2011 4:20 pm

zotty wrote:
Gort wrote:Friends,
I have my US:Intl and my large:small asset allocations all set. I'm having a devilish time trying to figure out my equities:bond allocation! How do YOU determine yours? I've seen much in this website about age in bonds and varieties of that such as age-10 and age-20. I've also seen 50:50 forever. I've done the Vanguard investor questionnaire and it tells me I should be in 40% bonds. I'm 58 years old and would like to retire in 2 years. I have enough saved to do so. Please give me your thoughts on this.
Thanks,
Gort
If i had enough already, and was sure that i had enough, i was would be 30/70 (stocks/bonds) or even 20/80. If I don't need the risk, i'm not going to take the risk.
I agree with this. If you have saved enough, I would suggest 30/70 stocks/bonds.

For a data-point, I hope to retire in 10-15 years, and I'm currently at 50/50. I will move to 40/60 in 5 years, and 30/70 5 years after that.

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Post by HomerJ » Mon Apr 25, 2011 4:47 pm

zotty wrote:Hey Yeti,
Fair enough. I was just thinking "you'll know after your portfolio crashes" might be a little late for someone looking to retire in 2 years.

Granted, I learned that way, and maybe we all have to learn that way, but maybe the OPs can learn something from our mistakes.

With that... I apologize for my snarky comment about too many snarky comments.

Cheers
But a very good point was made... We all just lived through a "crash" just two years ago.... If you didn't sell out at the bottom two years ago, then you know what your risk tolerance is...

If you did sell out, then you now know your risk tolerance is lower than you thought...

Saying "Wait until there's a crash and you'll know" is a very different answer from "Well, how did you handle the very recent crash?"

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Matt

Post by slowmoney » Mon Apr 25, 2011 5:47 pm

Matt wrote:
Your risk tolerance ultimately depends not on how much you might lose, but how much confidence you have in your investment strategy going forward.
Insightful. Why did you not write this the first time?

This worked well from 2009 to 2011. But what if the S&P was still at 666 in 2011? :evil:

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Post by tacster » Mon Apr 25, 2011 6:14 pm

matt wrote: And it is situational. For example, I was amazed at how members of a certain political party went from mere displeasure with the economic situation to all out panic when a certain president took office, even though little had fundamentally changed. They switched from "I believe in America and will buy stocks all the way down" to "America is doomed and stocks can only go further down". Do you think if you had asked them a year before that, they would have predicted how they'd respond? I assure you that none of them planned to reach their breaking point near the market bottom. Nonetheless, some of them did.
I'm pretty new here, but I thought political postings were not allowed. That's one of the things that attracted me to this forum. Maybe I was wrong.

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Post by V572625694 » Mon Apr 25, 2011 6:31 pm

zotty wrote:Too many snarky comments for a serious question. It's disappointing.

Maybe i'm the minority, but i just don't think it's funny at all. People need some help and there is really nowhere else to go where they can get reasonable advice for free or otherwise. it's a shame that this service to others has to get tainted insults along the way.

I remember why i stopped posting for a while.
I had the same feeling about the responses to the post on how to save on meds. Several people said "don't get sick," which is really asking the gods to give punish your pride.

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Post by biasion » Mon Apr 25, 2011 8:28 pm

V572625694 wrote:
zotty wrote:Too many snarky comments for a serious question. It's disappointing.

Maybe i'm the minority, but i just don't think it's funny at all. People need some help and there is really nowhere else to go where they can get reasonable advice for free or otherwise. it's a shame that this service to others has to get tainted insults along the way.

I remember why i stopped posting for a while.
I had the same feeling about the responses to the post on how to save on meds. Several people said "don't get sick," which is really asking the gods to give punish your pride.
You know, a lot of people actually seek healthcare when all they really need is reassurance? I realize the spirit of "don't get sick" is mean, but it's not bad advice. But I don't think those that posted have an appreciation for the complexities of the healthcare issues involved, so yes.

40% equity is fine. 50% market drop you are still down only 20%, and you have your 60% bonds. If the bonds go up 10% (a bit of coupon, a bit of capital appreciation), your losses for a 50% down market are not that bad.

What is your withdrawal rate you have in mind? Hopefully it is under 4%.
1. Do not confuse strategy with outcome | 2. Those who fail to plan plan to fail | 3. Do not assume the unlikely is impossible, and | 4. Be ready to deal with the consequences if you do.

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Gort
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Post by Gort » Tue Apr 26, 2011 11:31 am

Snarkiness aside, thanks for the comments. For those who asked, I was 60% equity/40% bonds in the last downturn. Stayed the course, albeit somewhat reluctantly, and came out quite well with the rebound. Staying the course helped me get to my current point and reading this board helped me maintain. Now that I'm closer to retirement I'm switching my allocation to age in bonds which I am comfortable with. My expected withdrawl rate will be 4%.
Thanks again,
Gort

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