Has your "risk tolerance" been tested?

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kathyauburn
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Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 8:57 am

One key determinant of a sensible asset allocation is "risk tolerance." I contend that the phrase "risk tolerance" means very little when people are initially confronted with the idea, and as a result people create their portfolios, at least initially, with very little to no understanding of what their risk tolerance actually is. I also contend that you won't really know what your true risk tolerance is until you've been tested, and this testing requires years if not decades. The Boglehead Wiki on this subject says that "To know whether a portfolio is right for your risk tolerance, you need to be brutally honest with yourself as you try to answer the question, 'Will I sell during the next bear market?'" The trouble with "brutal honesty"--a phrase that is frequently used--is that you cannot arrive at "brutal honesty" about risk tolerance in the absence of experience. You have to walk through the fire yourself once or twice.

So I have two questions for the group that may give others who are reading this some food for thought. First, has the risk tolerance that presumably went into determining your asset allocation actually been battle tested by market downturns?

Second, for those of you whose risk tolerance has been tested over time, how did the results of that test influence your asset allocation, if at all?

Thanks.
Last edited by kathyauburn on Sat Oct 07, 2017 9:07 am, edited 1 time in total.

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Re: Has your "risk tolerance" been tested?

Post by jebmke » Sat Oct 07, 2017 9:05 am

October 1987, 2001-2003, 2008-09. Retired in 2007;

During the first two events we were 70+% equity and probably 65-70% small/mid cap value.

going in to 2008 I had dropped equity (with new investments) to 40-45%. Still at 40% today.

I didn't do much tax harvesting in 2001-03 because a big part of our equity was in deferred accounts. 2008-09 was a tax loss harvester's bonanza.
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Re: Has your "risk tolerance" been tested?

Post by student » Sat Oct 07, 2017 9:07 am

I went through 2008-2009 with minimal changes to my AA. The one change actually make it slightly more aggressive. However, I was younger and hence I could take more risk. Now, I am not as aggressive.

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Re: Has your "risk tolerance" been tested?

Post by exoilman » Sat Oct 07, 2017 9:10 am

Age and assets will affect some of the of the answers.

Sam age 74 and no need to take risk.

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Re: Has your "risk tolerance" been tested?

Post by Sheepdog » Sat Oct 07, 2017 9:14 am

Absolutely I was tested in 2008-09. This thread says it all: viewtopic.php?f=10&t=25126&hilit=I+can%27t+believe
Last edited by Sheepdog on Sat Oct 07, 2017 9:15 am, edited 1 time in total.
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Re: Has your "risk tolerance" been tested?

Post by Tycoon » Sat Oct 07, 2017 9:15 am

Yes, we've been tested multiple times (starting in 1979). No, it hasn't changed our allocations.
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kathyauburn
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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 9:16 am

Sheepdog wrote:
Sat Oct 07, 2017 9:14 am
Absolutely I was tested in 2008-09. This thread says it all: viewtopic.php?f=10&t=25126&hilit=I+can%27t+believe
Very interesting. Thanks for sharing that. And what might have happened had less intelligent people been at the helm during that period?

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Re: Has your "risk tolerance" been tested?

Post by Toons » Sat Oct 07, 2017 9:19 am

Sure,,,
In financial and other areas of life,
Countless times.
Makes me a better person.
I enjoy leaving the "comfort zone" :happy
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Re: Has your "risk tolerance" been tested?

Post by dbr » Sat Oct 07, 2017 9:24 am

Yes, lots of times since 1970 or so. I have never responded to a market drop (or rise) by making an investment change in response to market action. I guess the idea that markets go up and markets go down always seemed so obvious that it comes with the territory if you are going to invest. We also were never at extreme asset allocations I guess because it seemed intuitively that extremes are never a good idea. That does not count reblancing, but I didn't know anything about asset allocation and reblancing during most of that almost fifty years now.

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 9:29 am

Sheepdog wrote:
Sat Oct 07, 2017 9:14 am
Absolutely I was tested in 2008-09. This thread says it all: viewtopic.php?f=10&t=25126&hilit=I+can%27t+believe
Some really great words of wisdom in that post you cited. I like this in particular:

Nothing can be said that will help. One lesson only - if you can't survive in retirement with 20% or less in stocks then it's too early to retire. I've always believed the risk isn't worth the reward and that sooner or later somebody besides me would believe it too. Sadly, we're becoming a community of believers...

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Re: Has your "risk tolerance" been tested?

Post by nisiprius » Sat Oct 07, 2017 9:30 am

2008-2009. 1987 was just a curiosity as I didn't have more than a year's salary in the stock market, only got quarterly mailed 401(k) statements, and just wasn't paying attention. 2000-2002 didn't really test it because I'd been pre-spooked in late 1996 by Greenspan's "irrational exuberance" speech, and also because I perceived it as just being an extreme but "normal" stock market event that I was at least half-expecting.

2008-2009 was very difficult for my wife and me, because retirement was within sight and we had pretty much completed what we thought of as our "life savings..." and because 2008-2009 did not feel just like a stock market event. Indeed, in the phrase Stephen King likes to use when things are getting really bad in his horror books, "the hits just keep on coming." (Do I need to explain that that was a stock phrase radio DJs used to use?) I actually lost track of the number of gigantic institutions that failed (or needed to be rescued). The talking heads on TV, Ben Bernanke and Henry Paulson and so on, had body language suggesting fear and, I thought I was even hearing the slightest trace of a tremor in what should have been their confident voices.

My wife and I both agreed that we should do absolutely nothing. And as I've said, the right description of 2008-2009 was not "we stayed the course" but "we froze like deer caught in the headlights."

I'm a fraidycat and have always had "too conservative" an allocation. As a matter of fact in 2007 I had gotten to thinking that maybe I had overdone it and maybe I should nudge our stock allocation up just a little bit. 2008-2009 showed that it was a good thing I hadn't. We had gauged it about right.

By the way, people who sold heavily in 2008-2009 don't like to talk about it, so always keep in mind that there is "survivorship bias" in peoples' stories about 2008-2009. The people willing to talk about it are mostly people who didn't sell. I was laid off in late 2008, so I don't know what happened to the colleague at work who sold all his 401(k) mutual fund holdings and put them into the 401(k)'s money market account in October 2008. And the wife of a friend who was working with an advisor, was invested aggressively, and, according to her husband, sold during the downturn--well, it's just not a subject I feel I can bring up with her so I don't know the details.
Last edited by nisiprius on Sat Oct 07, 2017 11:45 am, edited 2 times in total.
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kathyauburn
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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 9:34 am

nisiprius wrote:
Sat Oct 07, 2017 9:30 am
My wife and I both agreed that we should do absolutely nothing. And as I've said, the right description of 2008-2009 was not "we stayed the course" but "we froze like deer caught in the headlights."

I'm a fraidycat and have always had "too conservative" an allocation. As a matter of fact in 2007 I had gotten to thinking that maybe I had overdone it and maybe I should nudge our stock allocation up just a little bit. 2008-2009 showed that it was a good thing I hadn't. We had gauged it about right.

By the way, people who sold heavily in 2008-2009 don't like to talk about it, so always keep in mind that there is "survivorship bias" in peoples' stories about 2008-2009. the people willing to talk about it are mostly people who didn't sell. I was laid off in late 2008, so I don't know what happened to the colleague work who sold all his 401(k) mutual fund holdings and put them into the 401(k)'s money market account in October 2008. And the wife of a friend who was working with an advisor, was invested aggressively, and, according to her husband, sold during the downturn--well, it's just not a subject I feel I can bring up with her so I don't know the details.
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Re: Has your "risk tolerance" been tested?

Post by KlangFool » Sat Oct 07, 2017 9:35 am

kathyauburn wrote:
Sat Oct 07, 2017 8:57 am

So I have two questions for the group that may give others who are reading this some food for thought. First, has the risk tolerance that presumably went into determining your asset allocation actually been battle tested by market downturns?
kathyauburn,

I was 100/0 with individual Telecom stock during Telecom Boom and Bust. I lost 50% of my investment up to that point of time. There are 2 parts of this:

1) Market crash.

2) Job security. I thought that I had job security and my pay could only go up.

So, with market crash and quarterly laid off over that 5 1/2 years, my employer laid off 80% of its employees. I went to mostly cash for a few years.

Unfortunately, this is the kind of lesson that many will have to learn it the hard way. When a person is 30 to 40 and hit the peak earning years, nobody will believe that the good time will not last forever. I did not listen. I would not listen anyhow since I was a "Know It All".

So, when would a person do if the market crash and the person are unemployed for a fair amount of time? That is the risk!.

KlangFool

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 9:40 am

KlangFool wrote:
Sat Oct 07, 2017 9:35 am
kathyauburn wrote:
Sat Oct 07, 2017 8:57 am

So I have two questions for the group that may give others who are reading this some food for thought. First, has the risk tolerance that presumably went into determining your asset allocation actually been battle tested by market downturns?
kathyauburn,

I was 100/0 with individual Telecom stock during Telecom Boom and Bust. I lost 50% of my investment up to that point of time. There are 2 parts of this:

1) Market crash.

2) Job security. I thought that I had job security and my pay could only go up.

So, with market crash and quarterly laid off over that 5 1/2 years, my employer laid off 80% of its employees. I went to mostly cash for a few years.

Unfortunately, this is the kind of lesson that many will have to learn it the hard way. When a person is 30 to 40 and hit the peak earning years, nobody will believe that the good time will not last forever. I did not listen. I would not listen anyhow since I was a "Know It All".

So, when would a person do if the market crash and the person are unemployed for a fair amount of time? That is the risk!.

KlangFool
Thank you, KlangFool. I was hoping that posts like yours and those of others here would be the result of my question, as they provide food for thought. Understanding of your risk tolerance: I don't think you can't know it beforehand, and I don't think you can infer it accurately from other areas of your life. It seems to be something you have to earn, and one just has to hope that the cost is not debilitating.

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Re: Has your "risk tolerance" been tested?

Post by technovelist » Sat Oct 07, 2017 9:46 am

Yes. I have a very unconventional portfolio, which was tested in 2013-2015 after having flown through 2008-2009 without a hitch.
I wasn't tempted to change it when it went down about 30%.
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Re: Has your "risk tolerance" been tested?

Post by ruralavalon » Sat Oct 07, 2017 9:47 am

October 1987, 2001-2003, 2008-09. Self-employed, very volatile income. Retired in 2011.

During the first two events we were close to 100% equity, using an advisor at a brokerage. I made no changes to our investments basically because I was not paying attention at all to our portfolio.

I didn't start managing our investments until 2005, our asset allocation was 65/35. When the crash of 2008 happened the market changed us to about 35/65. Rather than rebalance back to where we started, I sold bonds and bought stock funds in December 2008, changed the asset allocation to 50/50, and throughout the crash bought stock funds with new contributions. Our asset allocation has been at 50/50 ever since.

2008 was quite a scare since I was within a few years of retirement, planned for January 2011. Fortunately the recovery was rapid enough that I did not have to delay retirement beyond my planned date.
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Re: Has your "risk tolerance" been tested?

Post by Chip » Sat Oct 07, 2017 9:53 am

Retired since mid-2001 and living off the portfolio. Tested in 1987, 1990, 2000-2 and 2008-9.

I don't remember what I did in 1987. Probably nothing. I think we were still using tin cans and string to communicate with our broker.

In 2000-2 I tax loss harvested and rebalanced into stocks (but not a "full" rebalance). I was 85%+ equity. The TLH really paid off when I sold a fully depreciated rental property in 2002, with stock losses offsetting much of the property gains.

I reduced my equity allocation to 75% in 2005, after realizing it was probably crazy to be that heavy in stocks in retirement. Plus my need to take risk declined. I dropped it to 70% in 2007.

I vividly remember rebalancing in the fall of 2008 and watching that money just disappear in a week's time. It felt like I'd shoveled it onto a bonfire. It really looked like the economy was going to collapse. So I stopped rebalancing, though I did some large Roth conversions in early 2009. I like to tell myself that those are sort of like rebalancing if one tax-adjusts the value of their accounts.

So it became apparent that I still had too much in equities since I couldn't pull the trigger on full rebalancing. I started slowly reducing my equity allocation in 2011. In 2015 I had an event that further reduced my need to take risk so I moved to 60/40. I expect to stay there.

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Re: Has your "risk tolerance" been tested?

Post by randomizer » Sat Oct 07, 2017 10:01 am

Still a virgin, apart from the tiny blips in 2015 and start of 2016 (barely enough to learn the mechanics of TLH). But have done so much reading about history and crashes that I feel pretty ready to weather the inevitable storm. A large emergency fund helps one feel confident about that.
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Re: Has your "risk tolerance" been tested?

Post by Daryl » Sat Oct 07, 2017 10:03 am

Nope, and that worries me. I graduated college in 2006, so I really didn't have much invested in 2008-2009. A decade later and I'll lose a boatload of money in the next bear market.

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Re: Has your "risk tolerance" been tested?

Post by BlackStrat » Sat Oct 07, 2017 10:20 am

ignorance is bliss and I just didn't pay too much attention in 2008; most likely because I assumed I'd never have enough for retirement.

Well the last bunch of years have been good to my portfolio and it's time to adjust my AA (currently 78/28). I really have a hard time emotionally (you can call it reckless greed) to not desire a continuance of the great returns in my equities holdings, but it's time to be realistic and realize the party won't last forever. Especially now that my job is being threatened and early retirement is possible.

At this point in my life I couldn't imagine dealing with a 2007-2008 market.

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Re: Has your "risk tolerance" been tested?

Post by magneto » Sat Oct 07, 2017 10:22 am

Risk tolerance?
Hmmm!
Downside Risk?
Upside risk not an issue?

Presumably the investor using a 'Constant Ratio (CR) Investment Formula Plan' will dial back their Stock exposure to suit a worst case scenario regardless of the surrounding markets?
This does limit the advantages of a more flexible 'Variable Ratio' (VR) valuation driven allocation, but the good news is that the CR investor will be fulfilling to some extent the sell high, buy low program, rather than never rebalancing.

We started out using VR as we had not realised that CR even existed, made any sense, and was advocated by so many Financial Planners.
The lead up to 1999/2000 was a startling test for us, feeling lonely being driven to reduce drastically our precious and so rewarding Stocks as the market surged ever higher, and having to seek refuge in Residential Real Estate then offering 6 to 10 times the real yield of Stocks.

So yes it was a test, but of a different kind; feeling lonely and uncertain as Stock enthusiasm raged.
Could we be wrong?
Last edited by magneto on Sat Oct 07, 2017 10:45 am, edited 3 times in total.
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Re: Has your "risk tolerance" been tested?

Post by BolderBoy » Sat Oct 07, 2017 10:26 am

2007-2009 my advisor had me 90/10 (wide variety of VERY risk things) and I watched 50% of my portfolio disappear. In 2009 (just before March), he sold and went to cash. :( I found the BHs at the end of 2009, fired the advisor, reinvested everything at 60/40 (VG 3-Fund Portfolio) gradually moving to 40/60 and retired in 2011. Presently at 30/70, recouped all my losses (and then some) from 2010-present.

Tested in 1987, 1990, 2000-2 , but was ignorant - and not knowing what to do I did mostly nothing (sold 10% of my portfolio in 2001 - had capital losses for years thereafter).

Prior to finding the BHs I had no idea what I was doing or how to find out.
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Re: Has your "risk tolerance" been tested?

Post by whodidntante » Sat Oct 07, 2017 10:27 am

BolderBoy wrote:
Sat Oct 07, 2017 10:26 am
2007-2009 my advisor had me 90/10 (wide variety of VERY risk things) and I watched 50% of my portfolio disappear. In 2009 (just before March), he sold and went to cash. :(
That's painful to read.

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Re: Has your "risk tolerance" been tested?

Post by dbr » Sat Oct 07, 2017 10:30 am

whodidntante wrote:
Sat Oct 07, 2017 10:27 am
BolderBoy wrote:
Sat Oct 07, 2017 10:26 am
2007-2009 my advisor had me 90/10 (wide variety of VERY risk things) and I watched 50% of my portfolio disappear. In 2009 (just before March), he sold and went to cash. :(
That's painful to read.
I thought the big argument for advisors is that they would prevent people from doing something stupid. I suspect in reality advisors are under even more pressure than investors to not be "responsible" for big losses. Of course advisors are probably on average more stupid than the average investor.

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Re: Has your "risk tolerance" been tested?

Post by FrugalInvestor » Sat Oct 07, 2017 10:31 am

I was early retired in '08-'09. My desired and actual AA prior to the downturn was 60 stocks/40 bonds. During the downturn I rebalanced into stocks but couldn't bring myself to go all the way back to 60/40. I discovered through that experience that my comfort level was 50/50 and that's where I've remained and intend to remain (within a 5% range).

As others have mentioned, the silver lining to '08-'09 was the opportunity to tax loss harvest. Fortunately I had the Bogleheads to school me on why and how to take advantage of that opportunity.
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Re: Has your "risk tolerance" been tested?

Post by goingup » Sat Oct 07, 2017 10:32 am

nisiprius wrote:
Sat Oct 07, 2017 9:30 am
My wife and I both agreed that we should do absolutely nothing. And as I've said, the right description of 2008-2009 was not "we stayed the course" but "we froze like deer caught in the headlights."
I think it was a quote from you that I jotted down during that time. "Be paralyzed when others are fearful and sleepy when others are greedy." I have no attribution noted, but seriously, who else but Nisi could inject such humor into those bleak times?!

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Re: Has your "risk tolerance" been tested?

Post by 2015 » Sat Oct 07, 2017 10:34 am

KlangFool wrote:
Sat Oct 07, 2017 9:35 am
kathyauburn wrote:
Sat Oct 07, 2017 8:57 am

So I have two questions for the group that may give others who are reading this some food for thought. First, has the risk tolerance that presumably went into determining your asset allocation actually been battle tested by market downturns?
kathyauburn,

I was 100/0 with individual Telecom stock during Telecom Boom and Bust. I lost 50% of my investment up to that point of time. There are 2 parts of this:

1) Market crash.

2) Job security. I thought that I had job security and my pay could only go up.

So, with market crash and quarterly laid off over that 5 1/2 years, my employer laid off 80% of its employees. I went to mostly cash for a few years.

Unfortunately, this is the kind of lesson that many will have to learn it the hard way. When a person is 30 to 40 and hit the peak earning years, nobody will believe that the good time will not last forever. I did not listen. I would not listen anyhow since I was a "Know It All".

So, when would a person do if the market crash and the person are unemployed for a fair amount of time? That is the risk!.

KlangFool
I'll see you two and raise you one: Market crash, job security, and real estate bust.

1) Market Crash: I think I was down about 25% before I capitulated and put everything in cash :oops: . I wasn't a "know it all", I just didn't know much of anything at the time, and that was the problem. I should have read, studied, and ensured I was increasing my comprehension on a daily basis. I didn't listen because I didn't know. It goes without saying that situation has now been rectified.

2) Job security: I remember "fondly" getting promoted to an upper upper tier leadership position, making the most money I'd ever made in my life, only to have that entire tier of leadership dissolved the next year. For my age, the statistics showed it should have taken well over year to get another job. It took only 7 months, got an even higher level position, again making more money than I'd ever made in my life, only to realize I'd landed in one of the worst political situations ever. Luckily, I found a port in the storm landing a job with an old boss tiding me over to retirement. Lesson: regardless of your position, there is no such thing as job security.

3) Real estate crash: Real estate values dropped by 50%, and at the time no one knew how far they would continue to fall.

It was personally a horrific time, given my age, and the devastating economic climate. It took nerves of steel to get through it all.

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Re: Has your "risk tolerance" been tested?

Post by dbr » Sat Oct 07, 2017 10:42 am

2015 wrote:
Sat Oct 07, 2017 10:34 am

2) Job security: I remember "fondly" getting promoted to an upper upper tier leadership position, making the most money I'd ever made in my life, only to have that entire tier of leadership dissolved the next year. For my age, the statistics showed it should have taken well over year to get another job. It took only 7 months, got an even higher level position, again making more money than I'd ever made in my life, only to realize I'd landed in one of the worst political situations ever. Luckily, I found a port in the storm landing a job with an old boss tiding me over to retirement. Lesson: regardless of your position, there is no such thing as job security.

Yes, I worked for a Megacorp that laid off people from time to time based on "this whole business needs to be cut back" and it didn't matter if you were a good performer or not. It seems those businesses were the stars of hardly a few years earlier. I was lucky, but the fear in that is much greater than the fear stocks will go up or down. The downside is that I always seemed to escape to a department that was doing well and consequently had to eventually retire without the benefit of a generous buyout.

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Re: Has your "risk tolerance" been tested?

Post by whodidntante » Sat Oct 07, 2017 10:47 am

I survived the dot bomb and Hurricane Lehman with my risk tolerance intact. Honestly I tend to be more interested in the stock market when it's tanking. I never entertained selling out of fear but I was very fortunate that I did not lose my job and need to sell as some did. I did have legitimate concerns about job loss but it ended well for me and I'm thankful for that.

In the parlance of Bogleheads where "emergency" cash allocations and near term savings buckets for cars and houses don't count, I would have been 100% stock until last year. I was never actually 100% stock. Currently I'm 90/10 and the "10" includes bonds, my stable value fund, and equity market neutral hedge funds. My cash is paltry and would run out in a month if I did not sell something or have positive cash flow.

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Re: Has your "risk tolerance" been tested?

Post by JBTX » Sat Oct 07, 2017 11:09 am

In 2000 my portfolio went down about 25-30%. I was overweighted in small caps, REITS and international which helped vs 50% market drop. I made no changes immediately. After a few years and a small cap run up i decreased my small cap weighting.

In 2008 our portfolio went down close to 50%. I did nothing. Unfortunately I was underweighted in bonds. Over the following years as the market went up I took our equity weighting down from about 75% to 60%.

I think the real test is if and when the market goes down and stays down for years. Most people here have been conditioned to think it bounces back up. That isn't always the case. Look at 30s. Look at mid 60s to 1982. Or worse look at Japan.

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Re: Has your "risk tolerance" been tested?

Post by Garco » Sat Oct 07, 2017 11:37 am

Tested?

In 1987, I was entering the last half of my career, with a 75-25 of salary contribution scheme since 1971. My senior co-workers were panicked by the crash. I didn't pay any attention to it. I kept on with 75-25, all in U.S. funds. I was required to contribute 15% from salary (5% "mine," and 10% "employer's"). That remained true for nearly 40 years with the same employer.

In 2000, was still making 75-25 contributions from salary, but in latter 1990's diversified to more risky tech and growth-oriented equities funds (not individual stocks). I was kicked in the head by the dot-com crash in March 2000. Lost a lot of money on paper (this was all in my defined contribution retirement fund). While I bailed from some of the riskier investments I kept my salary contributions at 75-25, or even a bit higher in equities.

By the end of 2007 (my fund peaked in October) I was still heavily exposed to equities and had surpassed my March 2000 accumulation by quite a bit (~40%), though had diversified to include international. Then October 2007 peak to bottom in March 2009, I lost about 40% of my retirement fund. But I was still contributing 15% from salary, and stayed 75-25 salary contributions while the fund recovered, which it fully did by early 2011.

So was my risk tolerance tested? Being mandated to contribute 15% from salary, and having no way to extract my money from my DC retirement fund, it was easy to be "risk tolerant" from a behavioral standpoint, even if in my mind there was a lot of anguish and I rooted around for alternative investments at times. When I neared retirement in 2012-2013 I began to adjust my cumulative holdings to a more conservative setting. But on the eve of retirement in my late sixties I was about 65% in equities. However, when I retired, and thus was no longer priming the pump with monthly salary contribution, I began to taper my holdings fairly sharply. Now three years after retirement I have about 45% in equities.

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Re: Has your "risk tolerance" been tested?

Post by oldcomputerguy » Sat Oct 07, 2017 11:38 am

I was 100% equities during the downturn. I can’t honestly say that I was tested, though, because in actual fact I was really naive about my 401k back then, and never made the connection between the newspaper articles and my retirement savings, so to this day I have no idea what happened to my balances during the crisis.
:oops:
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

retiredjg
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Re: Has your "risk tolerance" been tested?

Post by retiredjg » Sat Oct 07, 2017 11:42 am

My risk tolerance was tested as I retired just months before the start of the 2007 - 2009/10/11 unpleasantness. I was also invested in several previous events, but just never looked at my balances so those were not really a test.

I didn't change my allocations because of the crash that I can remember. I did change allocations because of retirement and getting older.

I did learn something, in retrospect, from the 2007 event that I think is very important and often overlooked. I didn't think I was affected much during those years. But looking back, I realized I had been very mildly uncomfortable for quite awhile during that time. And that continued because it took my portfolio many years to get back to where it had been. No bouncing involved for me - it crawled back.

Maybe all that stuff you hear about the market bouncing back so quickly applied to people who were still working and adding to their portfolios. For me, since I was withdrawing...it was very slow. And that wore on me a little.

When all this finally did sink in, I did reduce my stock allocation to about 10 points lower than I had originally intended. I decided I wanted to go through the next crash more comfortably than the last one even though the last one had not been particularly miserable.

People talk about choosing an allocation they can stick with, but many times it sounds like they pick something they think they can get through with teeth clenched, knuckles white - in other words...."gutting it out". I think it is a very poor approach, even if you actually do manage to stay the course.

Gutting something out for a few weeks is one thing. Gutting it out for 3 or 4 years is a different thing entirely. It affects your health, your relationships, your ability to work, your ability to have joy in life....pretty much everything. It's just not worth it.

So the bottom line is that yes, I did change my stock to bond ratio after it was all over - when I finally realized I'd been a little less than happy during those years when my portfolio was smaller than it had been before. This next time, I hope things are a little better.

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Sandtrap
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Re: Has your "risk tolerance" been tested?

Post by Sandtrap » Sat Oct 07, 2017 12:04 pm

Toons wrote:
Sat Oct 07, 2017 9:19 am
Sure,,,
In financial and other areas of life,
Countless times.
Makes me a better person.
I enjoy leaving the "comfort zone" :happy
Agreed.

And, with age and increasing assets, there's less need for a portfolio to take on risk.
:D

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 12:24 pm

whodidntante wrote:
Sat Oct 07, 2017 10:27 am
BolderBoy wrote:
Sat Oct 07, 2017 10:26 am
2007-2009 my advisor had me 90/10 (wide variety of VERY risk things) and I watched 50% of my portfolio disappear. In 2009 (just before March), he sold and went to cash. :(
That's painful to read.
It sure is.

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 12:28 pm

KlangFool wrote:
Sat Oct 07, 2017 9:35 am
Lesson: regardless of your position, there is no such thing as job security.

Those are words of wisdom. Teaching was the closest thing I came to having a job that was really secure ("so long as people continue *******, teacher jobs will always be there"). I thought govt was the next best thing, but no, that's not a sure thing, either, at any level.

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 12:33 pm

JBTX wrote:
Sat Oct 07, 2017 11:09 am
I think the real test is if and when the market goes down and stays down for years. Most people here have been conditioned to think it bounces back up. That isn't always the case. Look at 30s. Look at mid 60s to 1982. Or worse look at Japan.
Agree. That's why I said we were just lucky in 08-09 that smart folks who had studied history were there to pull some amazing feats. In other hands...

DrGoogle2017
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Re: Has your "risk tolerance" been tested?

Post by DrGoogle2017 » Sat Oct 07, 2017 12:36 pm

2000 time frame. 100% in stocks. Both my husband and I lost our jobs, it was startup mania in the Bay Area,we were over confident. I learned my lesson well and escaped 2008-2009 downturn. Same with 2015. Luckily we did crawl back to the market in late 2009 and not missing the market ride since.

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Re: Has your "risk tolerance" been tested?

Post by kathyauburn » Sat Oct 07, 2017 12:37 pm

retiredjg wrote:
Sat Oct 07, 2017 11:42 am
People talk about choosing an allocation they can stick with, but many times it sounds like they pick something they think they can get through with teeth clenched, knuckles white - in other words...."gutting it out". I think it is a very poor approach, even if you actually do manage to stay the course.

Gutting something out for a few weeks is one thing. Gutting it out for 3 or 4 years is a different thing entirely. It affects your health, your relationships, your ability to work, your ability to have joy in life....pretty much everything. It's just not worth it.
Very wise words. I agree.

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Re: Has your "risk tolerance" been tested?

Post by JBTX » Sat Oct 07, 2017 12:48 pm

kathyauburn wrote:
Sat Oct 07, 2017 12:33 pm
JBTX wrote:
Sat Oct 07, 2017 11:09 am
I think the real test is if and when the market goes down and stays down for years. Most people here have been conditioned to think it bounces back up. That isn't always the case. Look at 30s. Look at mid 60s to 1982. Or worse look at Japan.
Agree. That's why I said we were just lucky in 08-09 that smart folks who had studied history were there to pull some amazing feats. In other hands...
I totally agree. We are really lucky we had some of the people there. Bernanke actually was one of the experts of the Great Depression and had studied it extensively and written about it.

The flip side is there is a side of me that wonders if by saving ourselves short term have we put off an inevitable harder downfall. In the Great Depression household debt went from 100% of GDP to 20%. That was horribly painful but did give us the opportunity to grow for decades. This time we went from 100% of GDP down to 80, but increased govt debt by a higher amount. It saved us from immediate severe pain but still also potentially years, maybe decades of subpar growth.

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BuyAndHoldOn
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Re: Has your "risk tolerance" been tested?

Post by BuyAndHoldOn » Sat Oct 07, 2017 12:54 pm

I have not been investing for very long; only been in the workforce since 2012. (Some day that will be a long time ago).

Mostly I buy and hold and stick to an asset allocation. However:
*I bought Energy (read: Oil & Natural Gas) stocks in the 2015 stock market downturn, only to see them plunge even more in early 2016. I decided at from that experience that:
1) I was not a better investor than anyone else. I can research and have informed opinions, but my view of the future is just as cloudy as anyone's.
2) In a broad market selloff: buy the broad market. Whatever [sector of the economy] is causing [and/or is hardest hit by] the selloff may or may not be worth buying; but diversification rules the day.
3) I keep some of my "extra" savings in bonds, in case I get laid off/need to make a large purchase in a poor economy, etc. I don't only buy equities anymore.

Ironically: I made a ~23%+ return [pre-tax] on those energy stocks when the oil prices began to "rebound" from their all time lows. (OPEC rumors helped). I didn't want to keep holding the stocks as a long-term investment, however. --> That might be my biggest lesson of all.

4) I probably should not buy something I'd be afraid to hold onto as a long term investment. (There may be exceptions; and I may be wrong in identifying them even so).
Last edited by BuyAndHoldOn on Sat Oct 07, 2017 6:06 pm, edited 1 time in total.

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ram
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Re: Has your "risk tolerance" been tested?

Post by ram » Sat Oct 07, 2017 1:36 pm

Yes.
In 2008-09. Was stock:bond 90-10%. Stayed with the AA all through the downturn. In fact overbalanced in stocks by Mar 2009.
But now that I am in my 50's and thinking of retirement my risk tolerance (and need for risk) has decreased and I am currently 67-33%
Ram

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Re: Has your "risk tolerance" been tested?

Post by technovelist » Sat Oct 07, 2017 2:14 pm

JBTX wrote:
Sat Oct 07, 2017 12:48 pm
kathyauburn wrote:
Sat Oct 07, 2017 12:33 pm
JBTX wrote:
Sat Oct 07, 2017 11:09 am
I think the real test is if and when the market goes down and stays down for years. Most people here have been conditioned to think it bounces back up. That isn't always the case. Look at 30s. Look at mid 60s to 1982. Or worse look at Japan.
Agree. That's why I said we were just lucky in 08-09 that smart folks who had studied history were there to pull some amazing feats. In other hands...
I totally agree. We are really lucky we had some of the people there. Bernanke actually was one of the experts of the Great Depression and had studied it extensively and written about it.

The flip side is there is a side of me that wonders if by saving ourselves short term have we put off an inevitable harder downfall. In the Great Depression household debt went from 100% of GDP to 20%. That was horribly painful but did give us the opportunity to grow for decades. This time we went from 100% of GDP down to 80, but increased govt debt by a higher amount. It saved us from immediate severe pain but still also potentially years, maybe decades of subpar growth.
If the wild money printing of the past 10 years doesn't have massive negative consequences, it will be the first time in history that has ever been true.

Sure, it's possible that "it's different this time", but that's not a very good bet.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Has your "risk tolerance" been tested?

Post by Fallible » Sat Oct 07, 2017 2:44 pm

kathyauburn wrote:
Sat Oct 07, 2017 8:57 am
One key determinant of a sensible asset allocation is "risk tolerance." I contend that the phrase "risk tolerance" means very little when people are initially confronted with the idea, and as a result people create their portfolios, at least initially, with very little to no understanding of what their risk tolerance actually is. I also contend that you won't really know what your true risk tolerance is until you've been tested, and this testing requires years if not decades. The Boglehead Wiki on this subject says that "To know whether a portfolio is right for your risk tolerance, you need to be brutally honest with yourself as you try to answer the question, 'Will I sell during the next bear market?'" The trouble with "brutal honesty"--a phrase that is frequently used--is that you cannot arrive at "brutal honesty" about risk tolerance in the absence of experience. You have to walk through the fire yourself once or twice.

So I have two questions for the group that may give others who are reading this some food for thought. First, has the risk tolerance that presumably went into determining your asset allocation actually been battle tested by market downturns?

Second, for those of you whose risk tolerance has been tested over time, how did the results of that test influence your asset allocation, if at all?
Thanks.
Beginning investors with no direct market-crash experience have only willingness to take risk when they start out. But all is not lost, or doesn’t have to be. I think it’s possible to have a good idea, or a feeling or a sensing, of how much risk one can or wants to handle, not only with money but about a general approach to life. It’s then a matter of being true to those feelings. If, when deciding an allocation, new investors ask themselves how much money they can afford to lose in a crash and whether they will panic and sell, then if they are “brutally honest” in answering, they are more likely to choose an appropriate allocation to at least get started.

My risk tolerance has been tested in many crashes, beginning with the ’87 crash. Overall, I stayed the course, so I guess I can assume the AA was okay. But in ’08, I could not bring myself to rebalance at year’s end because I’d never seen anything like this global market crash, housing crash, a Great Recession, credit crunch and fears of total financial meltdown. And this, despite having all that crash experience. Thing is, crashes differ in many ways and one's risk tolerance can change often, so an AA that survives one crash, may not survive another.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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jhfenton
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Re: Has your "risk tolerance" been tested?

Post by jhfenton » Sat Oct 07, 2017 3:19 pm

We were tested in 2008. We had a six-figure portfolio at that point, and I was laid off in December 2008. We stayed 100% equities throughout, and my wife continued to contribute to her 401(k). At that point, our retirement accounts were the last thing on our mind. And I was convinced throughout that the whole thing was a paper crisis followed by an absurdly irrational panic. Whether I was right or not, it made it easy to keep investing when I expected things to snap back quickly.

We were in the market in 2000, but it wasn't much of a test. We were heavily tilted to small value, so we were actually up in 2000 and 2001. We finally lost money in the second half of 2002, but I never worried about it.

Only in the last two years have we moved from 100% equities to 80%/20% at the moment. It struck me in the last two years that at 47 we were far closer to retirement than to the beginning of our careers.

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Re: Has your "risk tolerance" been tested?

Post by ByThePond » Sat Oct 07, 2017 4:19 pm

Yes.
In 2008, I was still 100% equities and figured that I was 12 years away from retirement. When things started going South, and when I received a bump in income, I bit the bullet and plowed the whole salary increase into equities. It was kind of a white knuckle time, but I kept the faith that the market would rebound before I was ready to tap into it. My mental image was of crossing a deep river in a rowboat: It doesn't matter how deep the river is, if you don't get out of the boat 'til the other side.
It worked out even better than hoped for, and I'm considering advancing my retirement timeline. AA is about 65/35 now, btw.

2015
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Re: Has your "risk tolerance" been tested?

Post by 2015 » Sat Oct 07, 2017 6:18 pm

retiredjg wrote:
Sat Oct 07, 2017 11:42 am
My risk tolerance was tested as I retired just months before the start of the 2007 - 2009/10/11 unpleasantness. I was also invested in several previous events, but just never looked at my balances so those were not really a test.

I didn't change my allocations because of the crash that I can remember. I did change allocations because of retirement and getting older.

I did learn something, in retrospect, from the 2007 event that I think is very important and often overlooked. I didn't think I was affected much during those years. But looking back, I realized I had been very mildly uncomfortable for quite awhile during that time. And that continued because it took my portfolio many years to get back to where it had been. No bouncing involved for me - it crawled back.

Maybe all that stuff you hear about the market bouncing back so quickly applied to people who were still working and adding to their portfolios. For me, since I was withdrawing...it was very slow. And that wore on me a little.

When all this finally did sink in, I did reduce my stock allocation to about 10 points lower than I had originally intended. I decided I wanted to go through the next crash more comfortably than the last one even though the last one had not been particularly miserable.

People talk about choosing an allocation they can stick with, but many times it sounds like they pick something they think they can get through with teeth clenched, knuckles white - in other words...."gutting it out". I think it is a very poor approach, even if you actually do manage to stay the course.

Gutting something out for a few weeks is one thing. Gutting it out for 3 or 4 years is a different thing entirely. It affects your health, your relationships, your ability to work, your ability to have joy in life....pretty much everything. It's just not worth it.

So the bottom line is that yes, I did change my stock to bond ratio after it was all over - when I finally realized I'd been a little less than happy during those years when my portfolio was smaller than it had been before. This next time, I hope things are a little better.
I was just thinking while away in Mexico how lucky I've been to have retired into a bull market the last 2 1/2 years. I'm profoundly happier than when I was working, but I pondered how much my happiness would be impacted were I to have been in your situation (retiring into a bad bear market).

Now in retirement, my biggest takeaway from the entire 08 meltdown experience was to create a liability matching portfolio for the duration of my retirement. Regardless of what the market does, I'm insulated now. I think it was Dirk Cotton's blog where I first read that in retirement you only get "one whack at the cat." I don't want to take the chance of swinging and missing, and I'm willing to forego some upside in exchange for the peace of mind.

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Re: Has your "risk tolerance" been tested?

Post by Zedon » Sun Oct 08, 2017 3:32 am

I was lightly tested in 2008, I only had been working for about 8 years of low pay and didn't have much invested but I did stay the course with all I had in my roth, but it did affect me when I had new money to put in, even to this day, which is why I try to make it automatic otherwise I would keep hesitating. I now have a job with a pension which I will be fully vested in after 1.5 more years so that makes my tolerance much greater. A drop from 22k to 6k in the DOW would definitely make me a bit stressed but I don't feel I would sell. I am currently 75/25 and will probably change that about 10 years out from retirement.

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Re: Has your "risk tolerance" been tested?

Post by Tamalak » Sun Oct 08, 2017 3:40 am

Nope. I dumped my money into 100% VT stock in Sept 2015 (during a nice dip). It's been a smooth ride up so far, aside from an initial 10% drop that didn't bother me.

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Re: Has your "risk tolerance" been tested?

Post by Call_Me_Op » Sun Oct 08, 2017 6:21 am

Events in 2008 really shook me and even impacted my health.

In my retirement account, I stayed the course but suspended rebalancing into bonds.

But the real action was in taxable. I was stock-heavy (for me) and I sold the stock in mid September when the slide really accelerated. However, I bought back in in December - so it was a net positive, financially speaking. I also picked-up a bunch of TIPS at fire sale prices. What got me was that when I sold my stock in September 2008, the proceeds were sitting in a tax-exempt money market fund. Then the money markets began to come apart. The Feds stepped in and guaranteed all money market funds except for the tax-exempt. I spent a weekend in panic, as most of my net worth was sitting in a tax-exempt money market fund (and I couldn't move it, because this happened on a Friday afternoon). I learned on Monday that the Feds decided to extend their umbrella over the tax-exempt money markets too. But the emotional damage was done. The let-down from the extreme stress appears to have triggered a chronic vestibular migraine condition.

So one might say I bear the scars of 2008. It really did seem like the US financial system was coming-apart at the seams then. In fact, it may have been.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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