how did you determine your risk tolerance?

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bling
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how did you determine your risk tolerance?

Post by bling » Sat Feb 10, 2018 11:40 pm

the past couple months i've spent a lot more time browsing BHs and reading threads, etc., because i realized that holy crap, the market went up 20% in 2017!! i better re-evalulate my risk tolerance.

at the end of 2017, i was at a 75/25 asset allocation (i'm 33). at the time i thought maybe this was too aggressive for me. what if another 2008 happens and stocks dropped 50%? i adjusted my asset allocation to be a 70/30 split instead last december.

my job paid out a bonus in january, and i lump summed all of it into the market. now that we're officially in correction territory, i finally had an opportunity to experience "losses" (haven't sold) -- and i felt....nothing. despite buying literally at the top, it didn't bother me whatsoever.

the only thing that excited me was watching markets to see whether my thresholds for TLH would be hit.

what this tells me is maybe i should have stayed at 75/25, or maybe even do 80/20 instead. but we're only at 10% losses right now. maybe i'd feel different at 20%, 30%, 50% losses?

how did you figure out your appropriate risk tolerance without living through one?

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pokebowl
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Re: how did you determine your risk tolerance?

Post by pokebowl » Sun Feb 11, 2018 12:18 am

bling wrote:
Sat Feb 10, 2018 11:40 pm

how did you figure out your appropriate risk tolerance without living through one?

Really comes down to personal choices. There is "Ability" to take risk and a "Willingness" to take risk.

Ability will change over your lifetime based on your time horizon. One’s ability to assume or tolerate investment risk is quantitative. It’s based on factors like present and future income need versus present and future expenses, amount of income in excess of expenses, rate of saving, net worth, investment time horizon, and specified financial objectives, among other quantifiable facts and figures.

Typically, a greater ability to tolerate risk is associated with longer investment time horizons, recurring incomes in excess of expenses, and larger quantities of assets and/or anticipated assets in excess of expected present and future needs. These circumstances are associated with the ability to tolerate risk because they are thought to contribute to relative insulation from the effects of various degrees of investment risk on an investor’s overall financial condition.

Willingness is a subjective trait that is really based on your personality and level of knowledge when it comes to finance. Generally, if an investor’s ability to tolerate risk is greater than their willingness, willingness wins out, and the overall risk tolerance is adjusted down. On the other hand an investor with a higher tolerance for risk, who is not financially capable of withstanding the potential effects of the risks undertaken, has the capacity to cause serious harm to themselves.

So in your case you have the ability to take risk, as you indicated you are in your early 30's and hopefully have a long investment horizon. Other factors will come in to play as your lifestyle changes and you get older such as rate of saving, net worth, etc. The area where I believe you are getting hung up is willingness.

My question to you is why after a relativity short dip (taking us back to late 2017 levels) are you willing to change up your allocation? When in 2017 during these same levels you were at 75/25. What made you choose a 75/25 asset allocation in the first place? For your age you have options, and in my opinion can take more risk. The issue is what would you do if your portfolio dropped 30-40% and stayed that way for an extended period of time, or even years? If the answer is to keep your chosen allocation, be it 70/30, 80/20, 100/0, etc, then I do not see an issue.

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Noobvestor
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Re: how did you determine your risk tolerance?

Post by Noobvestor » Sun Feb 11, 2018 12:21 am

A couple of things to consider and ways of looking at it:

This is (so far) a pretty minor correction, and feels like an exciting buying opportunity. But what about a 30% crash? 50%?

And how much do you have in the market, relatively speaking? The 08/09 crash didn't bother me because I didn't have a lot of skin in the game. Now I do. To me, it makes sense to have an allocation and glide path plan that incorporate both age but also total portfolio value.

And keep in mind that the stock market can go down and stay down for long periods (see: 2000 to 2010). How will you feel if you're 80% in stocks, but that asset class underperforms for years (or longer)?

There's also a diminishing utility from upping equities beyond a certain point. Going from 70% to 100% equities has historically (could be different in the future) improved returns by about 1% per year, but at the expense of big drawdowns and volatility.

Finally: willingness is only part of the equation, there's also need and ability. How much risk do you need to take to reach your goals?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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privatefarmer
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Re: how did you determine your risk tolerance?

Post by privatefarmer » Sun Feb 11, 2018 12:41 am

1) what's the max amount you are willing to (temporarily) lose as a percentage?

2) expect stocks to fall by 50-60% in the worst drawdowns. Use that to determine how much stocks you can own.

I personally am 100% stocks.

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Re: how did you determine your risk tolerance?

Post by DrGoogle2017 » Sun Feb 11, 2018 12:50 am

Wait until you also get a lay off notice, stock market is down by a large percentage, it might take you years to find full employment, or maybe never. Your emergency fund is also gone and you have to pay COBRA or the like for health insurance.

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Svensk Anga
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Re: how did you determine your risk tolerance?

Post by Svensk Anga » Sun Feb 11, 2018 9:40 am

We held 90% equities for the bulk of our accumulation phase. However, we did not get there until age 36 from holding 50-70% prior. Some of that was just getting more comfortable with the whole investing business. A significant factor in the low prior allocation was including our emergency fund in the AA and it was relatively large compared to our long-term savings in the early years. The year we got to 90% was also the year my wife went back to work full time once the kids were in school. A second income and resulting boost in saving rate made the high allocation more comfortable. It looks like we shrank the emergency fund due to the second income, though I do not remember doing so on that reasoning.

There was none of the survey-based tolerance recommendations available then that I was aware of. I got to the 90% level mostly by educating myself regarding the relative prospects for equities and fixed income. A desire to be in position for potential early retirement suggested a higher need to take risk.

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Re: how did you determine your risk tolerance?

Post by magneto » Sun Feb 11, 2018 9:53 am

Firstly the need to understand 'risk'.
No matter what the academics might opine; it ain't just volatility.
Howard Marks suggests the risk that matters most is the risk of permanent loss.
Posters above have picked up on some horrifying worst case scenarios.

And for the value concious investor, there is the ever changing ongoing balance between that other risk 'downside risk' and the ever welcoming 'upside potential'.
It may be that for such investors a 'Constant Ratio Investment Formula Plan' does not cut it?
Otherwise dial back a Constant Ratio setting to sleep well.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Dottie57
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Re: how did you determine your risk tolerance?

Post by Dottie57 » Sun Feb 11, 2018 10:05 am

For me, risk Tolerance has changed over as I age and my portfolio has grown.

When The 401k started nothing bothered me until 2008. The financial crisis terrified me and AA began to change. Now at 50/50 and the last week hasn't bothered me. I have enough FI to carry me through a lot of years.

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Re: how did you determine your risk tolerance?

Post by buckstar » Sun Feb 11, 2018 10:07 am

You may not really know your market tolerance until it actually hits a 50% decline. It's easy enough to say 'it's a buying opportunity' when it's a 10% decline, but things are different when you're assets are down 50%. see below, funny, but true...

http://theirrelevantinvestor.com/2018/0 ... et-bottom/

dbr
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Re: how did you determine your risk tolerance?

Post by dbr » Sun Feb 11, 2018 10:24 am

One comment to add is that trying to "figure out" small differences in AA causes only stress and confusion. Talk to yourself about whether your AA should be 0/100, 30/70, 50/50, 70/30, or 100/0 and the decision becomes more evident with less analysis.

Otherwise the general advice is apply the thought process of need/ability/willingness to take risk.

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Garco
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Re: how did you determine your risk tolerance?

Post by Garco » Sun Feb 11, 2018 10:30 am

To the OP. Thirty-three, eh? I'd be 75% equities, too. In fact when I was age 30-55, I was always contributing 75% to equities in my tax deferred retirement plan. Never touched a thing, through ups and downs in the market between 1974 and 1999. I was focused on my family and my career! Stock market didn't mean anything to me in practical terms. But then I got excited by all the news of the dot-com revolution and began to fiddle with my allocation and my monthly contributions. I upped the ante to 85% equities contributions and then toward 90%, with an emphasis on growth stocks. Then what happened? I got kicked upside the head.

I don't regret keeping to 75% contributions during my early and middle career (which brought my accumulation to above 80% equities). Even flash crashes didn't faze me, while my near-retirement-age colleagues were panicking. I didn't know from Bogle. But I knew that I was investing for the long-run, and there were still many years to run.

Now it's true that after the 2001 crash I began to pay much more attention to my investments, induced both by the tumult in the market and the fact that I was nearing the end of my work career (a dozen years in the future). But as I approached retirement, I began to taper my retirement-fund allocation toward 65 and eventually toward 50% equities. Now in my main retirement account, it's 45%. I'm taking Social Security and drawing capital from the account to support my family budget, though the holdings are much larger now than they were just 3 years ago, mainly due to the "Trump Bump."

My general advice is that people in the prime of their career and their family's growth (and maybe large expenses for college) should focus on their jobs, their careers, and not on the market. They have to save money outside of their main retirement plan, including 529 plans and IRA's. But don't jump into or out of the market in reaction to specific events.

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Sandtrap
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Re: how did you determine your risk tolerance?

Post by Sandtrap » Sun Feb 11, 2018 10:49 am

bling wrote:
Sat Feb 10, 2018 11:40 pm
the past couple months i've spent a lot more time browsing BHs and reading threads, etc., because i realized that holy crap, the market went up 20% in 2017!! i better re-evalulate my risk tolerance.

at the end of 2017, i was at a 75/25 asset allocation (i'm 33). at the time i thought maybe this was too aggressive for me. what if another 2008 happens and stocks dropped 50%? i adjusted my asset allocation to be a 70/30 split instead last december.

my job paid out a bonus in january, and i lump summed all of it into the market. now that we're officially in correction territory, i finally had an opportunity to experience "losses" (haven't sold) -- and i felt....nothing. despite buying literally at the top, it didn't bother me whatsoever.

the only thing that excited me was watching markets to see whether my thresholds for TLH would be hit.

what this tells me is maybe i should have stayed at 75/25, or maybe even do 80/20 instead. but we're only at 10% losses right now. maybe i'd feel different at 20%, 30%, 50% losses?

how did you figure out your appropriate risk tolerance without living through one?
1 There is not much difference between 70/30 and 75/25
2 If you were comfortable with either of these you'd be comfortable with either.
3 If you'd feel different with losses of 20-30%, then perhaps you should revisit your IPS and allocation and risk tolerance. Because there can always be another 2008 around the corner. Adjust your allocation for the worse case scenario then don't fiddle. Otherwise you will be adjusting mid-stream on a big dip reactively.

This is the allocation strategy I use.
I hope it is helpful.
j :D

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goingup
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Re: how did you determine your risk tolerance?

Post by goingup » Sun Feb 11, 2018 10:58 am

It's a useful exercise to gage how you're feeling about the correction so far. I'd say it's too early to make conclusions.

My thought is it's better to be slow and stubborn about any changes to an AA or fund selection. The changes you're talking about are not consequential--yet I think it's better not to tinker.

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Re: how did you determine your risk tolerance?

Post by HongKonger » Sun Feb 11, 2018 10:59 am

I paid for an extensive online test.
I set my AA where it said I should.
I have slept well since.

KlangFool
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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 11:05 am

OP,

1) If you are laid off and unemployed for 2 years and the market is down by 50%, how much will you lose? How much of your portfolio that you will have to sell and lock in a loss? My portfolio is designed for me to suffer minimal loss if the market is down and I am unemployed for 2 to 3 years.

2) Your portfolio represents how many years of your savings? If it is down by 50% and stay down, do you have the time to save and recover the losses?

3) Your portfolio represents how many years of your current annual expense? How close are you to 25 times? Aka, how close are you to your FI number?

Answer (1) to (3), then, you have an objective measure of your ability to take the risk.

https://en.wikipedia.org/wiki/List_of_r ... ted_States

Historically, there is at least one US recession every 10 years since 1836. The last recession was 2007/2009. We are overdue for a recession before or around 2019 if we go by historical record.

Unless you have one of those jobs that will not be affected by any recession, you should assume that you may unemployed or under-employed for some time while the market is down.

During 2007/2009 recession, my employer laid off 50% of the employees at my location. I was lucky that my number wasn't up yet.

KlangFool

TravelforFun
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Re: how did you determine your risk tolerance?

Post by TravelforFun » Sun Feb 11, 2018 11:16 am

You wouldn't know what your risk tolerance level is until you live through a period like 2000-2001. During that period, those who had high risk tolerance level stayed the course and those who didn't, retreated.

TravelforFun

KlangFool
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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 11:25 am

TravelforFun wrote:
Sun Feb 11, 2018 11:16 am
You wouldn't know what your risk tolerance level is until you live through a period like 2000-2001. During that period, those who had high risk tolerance level stayed the course and those who didn't, retreated.

TravelforFun
TravelforFun,

I disagreed.

A) The portfolio size may be too small to matter.

B) The person may be younger and not subjected to age discrimination.

C) The person may have a stable job.

In summary, going through a recession while a person is younger and have a small portfolio does not translate into an ability to handle the risk later. (A) to (C) will be different in the subsequent recession.

KlangFool

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Re: how did you determine your risk tolerance?

Post by jeffyscott » Sun Feb 11, 2018 11:42 am

TravelforFun wrote:
Sun Feb 11, 2018 11:16 am
You wouldn't know what your risk tolerance level is until you live through a period like 2000-2001.
And/or 2008-2009.

I think a factor is also how much money you have invested at the time. Had about 6x as much invested in 2008 as in 2000, losing 50% of, say, $100,000 is a lot different than losing 50% of $600,000. Back then I set a plan for declining stock allocations with increasing balance, went from 75% to 50% over that time. So actual amount in stocks went up by about a factor of 4, while total invested went up by a factor of about 6.
press on, regardless - John C. Bogle

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Re: how did you determine your risk tolerance?

Post by thangngo » Sun Feb 11, 2018 11:49 am

bling wrote:
Sat Feb 10, 2018 11:40 pm
the past couple months i've spent a lot more time browsing BHs and reading threads, etc., because i realized that holy crap, the market went up 20% in 2017!! i better re-evalulate my risk tolerance.

at the end of 2017, i was at a 75/25 asset allocation (i'm 33). at the time i thought maybe this was too aggressive for me. what if another 2008 happens and stocks dropped 50%? i adjusted my asset allocation to be a 70/30 split instead last december.

my job paid out a bonus in january, and i lump summed all of it into the market. now that we're officially in correction territory, i finally had an opportunity to experience "losses" (haven't sold) -- and i felt....nothing. despite buying literally at the top, it didn't bother me whatsoever.

the only thing that excited me was watching markets to see whether my thresholds for TLH would be hit.

what this tells me is maybe i should have stayed at 75/25, or maybe even do 80/20 instead. but we're only at 10% losses right now. maybe i'd feel different at 20%, 30%, 50% losses?

how did you figure out your appropriate risk tolerance without living through one?
By determining when do I need to withdraw the invested money. If you set up your personal finance and risk management correctly, you only buy in accumulation period and only sell when you are ready to become financial independent. If you're only buying, the cheaper the market, the better wealth you will accumulate at the end of your saving phase.

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Re: how did you determine your risk tolerance?

Post by Chip » Sun Feb 11, 2018 11:53 am

I agree with TravelforFun. It is very difficult to know without having lived through something like 2008-9 while owning a significant portfolio. Time to trot out one of my favorite quotes, from Fred Schwed in "Where Are The Customer's Yachts?":

"Like all of life's rich emotional experiences, the full flavor of losing important money cannot be conveyed through literature. Art cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin either by words or pictures."

I believe that it was Rick Ferri that made the point here that if you went through 2008-9 and did NOT rebalance back to your target AA each time your rebalance bands were breached, then you had too much in stocks and whatever your stock/bond allocation was at the bottom was an appropriate new AA target.

I failed Rick's test, or maybe got a D. I rebalanced a couple of times in early 2009 and watched that money evaporate very quickly. I think at the bottom I was at 60/40 vs. my 70/30 target. So I let the portfolio recover until 2012, then began moving back to 60/40. I finally got there in 2015 and expect to stay there. I'm retired and living off the portfolio, just as I was in 2008-9. So it was several years of living expenses that disappeared for a while in 2008-9.

Ron Scott
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Re: how did you determine your risk tolerance?

Post by Ron Scott » Sun Feb 11, 2018 11:58 am

You ask your wife. No?

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Re: how did you determine your risk tolerance?

Post by IlliniDave » Sun Feb 11, 2018 12:08 pm

It was something I learned about as I went. It's not like determining your weight where you can measure it with a scale. Actually after ~30 years saving/investing I probably still couldn't state what my risk tolerance is. I just stay away from things that make me too uncomfortable.
Don't do something. Just stand there!

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Re: how did you determine your risk tolerance?

Post by bertilak » Sun Feb 11, 2018 12:13 pm

I simply went for 50/50 thinking anything other than that was "placing a bet" and that was what got one into risky territory.

I could be convinced there is some other "golden ratio" that defines a neutral position but until I find one I'll stick with 50/50.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

bling
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Re: how did you determine your risk tolerance?

Post by bling » Sun Feb 11, 2018 12:25 pm

thank you for all the responses so far.
pokebowl wrote:
Sun Feb 11, 2018 12:18 am
My question to you is why after a relativity short dip (taking us back to late 2017 levels) are you willing to change up your allocation? When in 2017 during these same levels you were at 75/25. What made you choose a 75/25 asset allocation in the first place?
at the end of 2017 after a long bull market i read up threads here on BH on how to figure out your risk tolerance. like some of the responses on here already, how would you feel if the market crashed 50%? but now that i've actually lived through a 10% correction, and literally feel nothing, i think my original estimation of my actual risk tolerance is too conservative.
Noobvestor wrote:
Sun Feb 11, 2018 12:21 am
And how much do you have in the market, relatively speaking?
my checkings account has an average cash balance of $500. everything else is invested.
KlangFool wrote:
Sun Feb 11, 2018 11:05 am
1) If you are laid off and unemployed for 2 years and the market is down by 50%, how much will you lose? How much of your portfolio that you will have to sell and lock in a loss? My portfolio is designed for me to suffer minimal loss if the market is down and I am unemployed for 2 to 3 years.

2) Your portfolio represents how many years of your savings? If it is down by 50% and stay down, do you have the time to save and recover the losses?

3) Your portfolio represents how many years of your current annual expense? How close are you to 25 times? Aka, how close are you to your FI number?
my current portfolio size is 65x my monthly expenses. however, in a worst case scenario where stocks crash 50%, and i lose my job, and i'm forced to sell everything at the bottom, i'd only have 42x monthly expenses. from those numbers, i'm looking pretty good, however about 75% of my investments are in tax advantaged space, so maybe not. if i use my roth as an emergency fund, at half its current value it can last 20 months.

i've been saving at least 15% of my income since my early twenties, although by pure luck i avoided the 2008 crash because i had to sell everything.
my current savings rate is ~40% of my income. i got another 30 years of working ahead of me, unless i hit my target and retire early :twisted:

but, i also live in a HCOL area. if i wanted to move to the middle of no where and live off instant noodles i can retire now -- although my wife and kids would have something to say about that....
Last edited by bling on Sun Feb 11, 2018 12:51 pm, edited 1 time in total.

jminv
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Re: how did you determine your risk tolerance?

Post by jminv » Sun Feb 11, 2018 12:27 pm

There are free risk tests online that you can take. There are also indirect ones. If you go to the Schwab Intelligent Portfolio website, click on open account (you don't actually end up opening an account, lets you see the results before that), and then go through all the questions it will give you a risk profile with suggested assets. I'm not endorsing Schwab or that portfolio at all, in fact, the cash drag is a major negative and how Schwab makes money with this product. It will, however, give you a very quick idea of what risk profile you would be comfortable with. From the sound of it, you have had a fairly low tolerance for risk although, have readjusted it somewhat in light of the 10% drop, and it should be even higher since you are younger.

bling
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Re: how did you determine your risk tolerance?

Post by bling » Sun Feb 11, 2018 12:35 pm

i just took vanguard's test: https://personal.vanguard.com/us/FundsInvQuestionnaire

it's telling me to be 100% in stocks which i think it's absolutely insane.

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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 12:54 pm

bling wrote:
Sun Feb 11, 2018 12:25 pm

my current portfolio size is 65x my monthly expenses. however, in a worst case scenario where stocks crash 50%, and i lose my job, and i'm forced to sell everything at the bottom, i'd only have 42x monthly expenses. from those numbers, i'm looking pretty good, however about 75% of my investments are in tax advantaged space, so maybe not. if i use my roth as an emergency fund, at half its current value it can last 20 months.
bling,

I believe you are 70/30 now. So, if the stock market drop by 50% and bond stay the same, you will have 65% (35% + 30%) left.

Your portfolio is 5.5 times your annual expense. If the market crashes 50%, you will have 65% X 5.5 = 3.58 ~ 42 months left.

<<however about 75% of my investments are in tax advantaged space,>>

Other than Roth contribution, you will pay 10% early withdrawal penalty in order to use that money.

<<my current savings rate is ~40% of my income.>>

How does that translate into as a percentage of your annual expense? 50%? In that case, it will take you, 5.5/0.5 = 11 years to recover the money.

In summary, as far as I can tell, at 70/30, if the recession lasts about 2 years and you are unemployed, your portfolio will be almost totally wipe out.

So, do you have the ability to take the risk of 70/30?

KlangFool

bling
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Re: how did you determine your risk tolerance?

Post by bling » Sun Feb 11, 2018 1:15 pm

KlangFool wrote:
Sun Feb 11, 2018 12:54 pm
In summary, as far as I can tell, at 70/30, if the recession lasts about 2 years and you are unemployed, your portfolio will be almost totally wipe out.
if my current portfolio is 100% stocks, and i sell at 50% of its value, i can last 32 months.
if my current portfolio is 100% bonds, and i sell at 100% of it value, i can last 65 months.

in your doomsday scenario, we're talking about being able to sustain total unemployment for 2.5 years vs 5.4 years.

i'm of the opinion that if the economy ever got that bad it doesn't matter what my asset allocation is, all of us have bigger problems.

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Re: how did you determine your risk tolerance?

Post by Fallible » Sun Feb 11, 2018 1:58 pm

bling wrote:
Sun Feb 11, 2018 12:35 pm
i just took vanguard's test: https://personal.vanguard.com/us/FundsInvQuestionnaire

it's telling me to be 100% in stocks which i think it's absolutely insane.
There is more information on the downsides to risk tolerance questionnaires and also links to Larry Swedroe's three blogs on need, ability, and willingness to take risk on the wiki's "Risk tolerance" page: https://www.bogleheads.org/wiki/Risk_tolerance

For me, a basic question to ask when determing tolerance for risk is simply to ask how much I can afford to lose in a downturn before the money is needed.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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Phineas J. Whoopee
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Re: how did you determine your risk tolerance?

Post by Phineas J. Whoopee » Sun Feb 11, 2018 2:22 pm

Here's what I did, and a couple of years later I answered some questions about it.

I offer it not as a prescription, but as a contrasting angle, to throw more light on the overall question and expose more of its contours.

For the record, I think an age-based asset allocation approach will be far more practical for most investors.

PJW

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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 2:50 pm

bling wrote:
Sun Feb 11, 2018 1:15 pm
KlangFool wrote:
Sun Feb 11, 2018 12:54 pm
In summary, as far as I can tell, at 70/30, if the recession lasts about 2 years and you are unemployed, your portfolio will be almost totally wipe out.
if my current portfolio is 100% stocks, and i sell at 50% of its value, i can last 32 months.
if my current portfolio is 100% bonds, and i sell at 100% of it value, i can last 65 months.

in your doomsday scenario, we're talking about being able to sustain total unemployment for 2.5 years vs 5.4 years.

i'm of the opinion that if the economy ever got that bad it doesn't matter what my asset allocation is, all of us have bigger problems.
bling,

<< i'm of the opinion that if the economy ever got that bad it doesn't matter what my asset allocation is, all of us have bigger problems.>>

Not me. You will be in trouble. I had survived many recessions.

Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bubble and Bust, 2007/2009 recession.

In fact, the usual common advice for recession is to expect an unemployment period of 2 years. I can survive for 5 years now without selling and suffer any permanent loss.

<< in your doomsday scenario, we're talking about being able to sustain total unemployment for 2.5 years vs 5.4 years.>>

I had been unemployed for more than 1 year a few times. You may not think there is a difference between 2.5 years and 5.4 years. But, it does. At year 2, if you have only 6 months of the buffer, you may take whatever job that comes along. Then, you are stuck at low pay for the next few years. Now, if you have 1 or 2 more years of the buffer, you could hold out for the better offer.

KlangFool

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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 3:12 pm

OP,

1) So, you have only $500 in your checking account as your emergency fund.

2) You are 100% stock in your Roth IRA.

3) If you are unemployed and the stock market drop by 50%, how long can you last with that $500?

4) After that, you have to sell your stock and withdraw from Roth IRA at 50% loss in order to sustain your lifestyle. Or, you could sell stock at Roth IRA and buy it back at your Rollover IRA.

5) You have about 20 months of fixed income at 70/30. After that, you will lock in 50% loss with your stock.

What is your ability to take the risk?

KlangFool
Last edited by KlangFool on Sun Feb 11, 2018 3:23 pm, edited 1 time in total.

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SVariance1
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Re: how did you determine your risk tolerance?

Post by SVariance1 » Sun Feb 11, 2018 3:21 pm

I agree with those who have said, the only way to get an accurate assessment of one's risk tolerance is to experience a severe bear market.
Mike

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Re: how did you determine your risk tolerance?

Post by investorpeter » Sun Feb 11, 2018 3:24 pm

If you've only been investing for a couple of years, I would say that you have not had sufficient experience to be able to define your tolerance for risk. The past two years until the past couple of weeks have been unprecedented in terms of low volatility growth in the stock market. The ongoing correction is relatively minor and does not provide a sufficient test for assessing your risk tolerance, especially since it is being portrayed in the media as a "technical" correction. Wait until there is a major news event like war, debt crisis, oil shortage (or all at the same time) followed by a rapid drop in the stock market, and then the talking heads on TV pontificate on the coming decade of doom and gloom.

But 75/25 sounds like a reasonable place to start for a retirement portfolio for someone of your age that can be adjusted over the years as you figure out your risk tolerance, which may also change over time as your portfolio grows. But make sure you are talking about your retirement portfolio or some other investment with a long time horizon. If you are talking about funds that would be used for a down payment on a house in the next 5 years then 75/25 is too risky. That should probably be kept as a cash or in a CD.

Risk tolerance depends a lot on the intended use of the money. If the money is being used for a planned purchase or living expenses within the next 5 years, then your tolerance for risk should be minimal. It may seem like a good idea to park that money in a high equity allocation to "make your money work" while you are saving, but I can tell you from personal experience that it will be VERY HARD/IMPOSSIBLE to stay calm when you are faced with losing 50%-100% of the down-payment of your home.

I think one of the misconceptions I had about risk tolerance when I was just starting out with investing, was that I did not distinguish between the risk tolerance for retirement savings versus risk tolerance for savings for a home or car purchase. I just sort of combined the entire portfolio into a single bucket which can lead to some emotional decision making. I would say that for most people, risk tolerance should be somewhat of a bell curve, with low tolerance in your 20s-30s as you are saving to invest in your education, house, daily expenses; maximum tolerance in your 30s-50s due to earning power and flexibility in choice of retirement date; with reduction of tolerance in your 50s-60s until retirement.

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Re: how did you determine your risk tolerance?

Post by Sheepdog » Sun Feb 11, 2018 3:26 pm

delete
Last edited by Sheepdog on Sun Feb 11, 2018 3:28 pm, edited 1 time in total.
People should not say everything they think. They should think about everything they say.

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Sheepdog
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Re: how did you determine your risk tolerance?

Post by Sheepdog » Sun Feb 11, 2018 3:28 pm

2000-2002
People should not say everything they think. They should think about everything they say.

Lonestarz
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Re: how did you determine your risk tolerance?

Post by Lonestarz » Sun Feb 11, 2018 3:28 pm

I think these threads are a bit silly because everyone always talks about how the loss is temporary and how the market will always recover and stocks will always outperform bonds. With so much confidence why would anyone not invest long term assets in stocks?

Some people are very logical and can methodically plan out their future. Others act on emotion. Nobody can tell you how you will behave but if you are honest with yourself about it, that is the best projection in my opinion.

Not how you will handle the drop, but the uncertainty.

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Re: how did you determine your risk tolerance?

Post by JoeRetire » Sun Feb 11, 2018 3:31 pm

bling wrote:
Sat Feb 10, 2018 11:40 pm
at the end of 2017, i was at a 75/25 asset allocation (i'm 33). at the time i thought maybe this was too aggressive for me. what if another 2008 happens and stocks dropped 50%? i adjusted my asset allocation to be a 70/30 split instead last december.
To me, it's hard to imagine 5% mattering all that much either way. If I were worried about "2008 and stocks dropped 50%" at 75/25 I would likely be just as worried at 70/30.
how did you figure out your appropriate risk tolerance without living through one?
I'm 30 years older than you, so I've already lived through a few... Some things you can't truly know without life experience.

Still, I spent some quality time with a paid adviser talking it over. She asked lots of good questions. What did I do in 2008 and prior critical times, what have I done since, etc, etc. We talked about what bothers me and what would let me sleep at night. We considered my age and investments. Etc, etc.

Most importantly, we talked about my goals.

We finally settled on 65/35. It feels good to me. I haven't been tempted to change it at all in the last 5 years.

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Re: how did you determine your risk tolerance?

Post by SVariance1 » Sun Feb 11, 2018 3:38 pm

The market was up substantially in 2003. The internet bubble popped and resulted in substantial declines from 2000 to 2002. With that said, value investors did okay during this period, at least on a relative basis. The markets panicked far more in 2008 into early 2009. There was no where to hide in this period. Since March 9th 2009, we have seen dramatically higher stock prices and extraordinarily low volatility, until the last couple of weeks.
Mike

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Re: how did you determine your risk tolerance?

Post by JoeRetire » Sun Feb 11, 2018 3:41 pm

bling wrote:
Sat Feb 10, 2018 11:40 pm
what this tells me is maybe i should have stayed at 75/25, or maybe even do 80/20 instead. but we're only at 10% losses right now. maybe i'd feel different at 20%, 30%, 50% losses?
Here's something you could try.

You only have to answer seven quick questions: https://gps.ricedelman.com/

It won't substitute for real analysis, and most critically it doesn't consider your goals (which to me are the most important), but it might give you a little insight into your risk tolerance and a proposed asset allocation.

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patrick013
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Re: how did you determine your risk tolerance?

Post by patrick013 » Sun Feb 11, 2018 3:44 pm

If a broker told me now is not a good time to be in the stock
market and I said well personal consumption is rising he should
reply maybe it's just that the wrong companies are in the index
right now.

We can stay in the market, go 50-50, or cash out while the market
is still high and wait for it to reboot. Worst mistake is to
leave the market and sell at the lowest point for any reason.

With personal consumption expenditures stable or at least rising
index replacement would look needed if a profit recession occurs.

Stay the course is never a bad idea if you can afford it as the
companies in the index will eventually get that share of personal
spending into their profit structure. So your stock AA is not
lost just treading water for awhile so the index can reboot
if a lengthy downturn does occur. We may not get fantastic gains
the next ten years but lengthy losses are not forecast either.



See here :

https://myphotos.mypclinuxos.com/images ... ce2016.png
age in bonds, buy-and-hold, 10 year business cycle

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Re: how did you determine your risk tolerance?

Post by bling » Sun Feb 11, 2018 3:44 pm

KlangFool wrote:
Sun Feb 11, 2018 3:12 pm
OP,

1) So, you have only $500 in your checking account as your emergency fund.

2) You are 100% stock in your Roth IRA.

3) If you are unemployed and the stock market drop by 50%, how long can you last with that $500?

4) After that, you have to sell your stock and withdraw from Roth IRA at 50% loss in order to sustain your lifestyle. Or, you could sell stock at Roth IRA and buy it back at your Rollover IRA.

5) You have about 20 months of fixed income at 70/30. After that, you will lock in 50% loss with your stock.

What is your ability to take the risk?

KlangFool
1) i don't believe in emergency funds because holding cash is losing money. if it comes to it, i will sell in taxable and rebalance in tax-advantaged (https://www.bogleheads.org/wiki/Placing ... ed_account)

2) yep.

3) obviously not very long. but there are other things we have not discussed. we have not talked about unemployment benefits. nor selling the house, or taking out a HELOC. i could even last for 2-3 years with credit cards alone, then deplete my investments, followed by bankruptcy a couple years later :twisted:

4) since we're talking about 2-5 years of unemployment, a 6 month cash emergency fund isn't going to do you any good.

5) under your given scenario, yes.

what you've illustrated is the absolute worst case scenario such that the only option is to be 100% cash (since even bonds can lose money in the proper recession).

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Re: how did you determine your risk tolerance?

Post by BogleMelon » Sun Feb 11, 2018 3:51 pm

bling wrote:
Sun Feb 11, 2018 3:44 pm
KlangFool wrote:
Sun Feb 11, 2018 3:12 pm

3) If you are unemployed and the stock market drop by 50%, how long can you last with that $500?
1) i don't believe in emergency funds because holding cash is losing money


3) obviously not very long. but there are other things we have not discussed. we have not talked about unemployment benefits. nor selling the house, or taking out a HELOC. i could even last for 2-3 years with credit cards alone, then deplete my investments, followed by bankruptcy a couple years later :twisted:
OP:
Seriously? You prefer to go through this pain than to lose couple of percentages in inflation for holding $10K in a high yield saving account? You can even have your EF in Ibonds and not lose anything for inflation, and avoid that catastrophic scenario when something that happens too often these days is happening to you! :oops:
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: how did you determine your risk tolerance?

Post by Toons » Sun Feb 11, 2018 3:54 pm

When I successfully rewired my brain,many years ago, to grasp the fact that bear markets are opportunity and should be embraced
:D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 3:59 pm

bling wrote:
Sun Feb 11, 2018 3:44 pm

what you've illustrated is the absolute worst case scenario such that the only option is to be 100% cash (since even bonds can lose money in the proper recession).
bling,

I have been through many recessions. It is normal for folks to be unemployed for 2 years in a recession.

<< such that the only option is to be 100% cash (since even bonds can lose money in the proper recession).>>

Not in your case. You could decide to keep 6 months in cash and 18 months in fixed income.

At 70/30 with 65 months of expense, you have 19.5 months in fixed income. You are close to support 2 years of recession. You need more cash as the emergency fund. It should be at least 3 months.

<<we have not talked about unemployment benefits.>>

It is about 10K in my case. It will last me 2 months. How much will you get? Did you check?

<<nor selling the house,>>

If you can find any buyer before your money run out. If you can find a buyer, it is 50% loss or more.

<<or taking out a HELOC.>>

This much be a joke!! You should know this.

A) HELOC can be canceled anytime.

B) You could net get HELOC while you are unemployed.

In summary, I have been unemployed in a recession a few times. So, I actually go through all those calculation to make sure that I am prepared.

KlangFool

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Re: how did you determine your risk tolerance?

Post by Noobvestor » Sun Feb 11, 2018 4:08 pm

bling wrote:
Sun Feb 11, 2018 12:25 pm
thank you for all the responses so far.
Noobvestor wrote:
Sun Feb 11, 2018 12:21 am
And how much do you have in the market, relatively speaking?
my checkings account has an average cash balance of $500. everything else is invested.

my current portfolio size is 65x my monthly expenses. however, in a worst case scenario where stocks crash 50%, and i lose my job, and i'm forced to sell everything at the bottom, i'd only have 42x monthly expenses. from those numbers, i'm looking pretty good, however about 75% of my investments are in tax advantaged space, so maybe not. if i use my roth as an emergency fund, at half its current value it can last 20 months
You have about five years' worth of expenses saved up - a good start, but presumably you're aiming for something like five times that (25x annual expenses) before retirement. So on the one hand, you can afford to take risk, because most of your future net worth is still presumably tied up in human capital - i.e. your continued ability to work. On the other hand, as your portfolio grows, that will be less and less the case. For now, I'd say go with what's comfortable to you, but if you do push your equity allocation higher now, have a plan to reduce it as your nest egg grows.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: how did you determine your risk tolerance?

Post by btownguy » Sun Feb 11, 2018 4:31 pm

I was 80/20 during the 2008 crisis and that was too aggressive for my sanity at the time. I held throughout thankfully. In this recent run up I’ve gradually taken some profits rebalancing closer to 60/40. I’m also 10 years older now so some rebalancing is appropriate. I’ve not lost any sleep in this correction and my heart rate has barely budged so I think I’m in the right ballpark. I’m also about 10 years out from RE, so there’s time if we have another crisis.

investorpeter
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Re: how did you determine your risk tolerance?

Post by investorpeter » Sun Feb 11, 2018 4:41 pm

bling wrote:
Sun Feb 11, 2018 3:44 pm

1) i don't believe in emergency funds because holding cash is losing money. if it comes to it, i will sell in taxable and rebalance in tax-advantaged (https://www.bogleheads.org/wiki/Placing ... ed_account)
This is a set up to make an emotional decision at the worst possible moment. The emergency fund is as much about peace of mind as it is for an actual emergency. If you know you don't have to worry about the next six months' mortgage, insurance, utility and car payments, you are much less likely to make a drastic decision with your overall portfolio. Are you really going to be disciplined enough to sell your taxable account in increments to cover your next month's expenses, even as your portfolio shrinks each time you log in to your account? It is more likely that you would decide to completely exit your equity positions entirely and tell yourself that you will get back in when "things are back to normal". Of course, you'll never know when that will be, as you might think things are normal after a period of stability and the market will then hit new lows. Only when you have given up hope of finding the bottom will the market rise again. I know it sounds crazy, but the stock market is like that during times of volatility. It is very much driven by the emotions of people who have taken on more risk than they can handle.

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Re: how did you determine your risk tolerance?

Post by khangaroo » Sun Feb 11, 2018 4:50 pm

I based on my risk tolerance on when I expected to use the money. Since I'm 29, I don't anticipate on touching any of the $$ in my retirement accounts (where the majority of my money is) for at least 30+ years. I'm also a big risk-seeker and completely comfortable with risk, both in life and in the market, so I can put up with all the swings - doesn't bother me one iota. Therefore I'm 100% equities with my 2 fund portfolio.

As Dave Ramsey says, "you only get hurt on the roller coaster if you jump off."

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Re: how did you determine your risk tolerance?

Post by KlangFool » Sun Feb 11, 2018 5:04 pm

khangaroo wrote:
Sun Feb 11, 2018 4:50 pm
I based on my risk tolerance on when I expected to use the money. Since I'm 29, I don't anticipate on touching any of the $$ in my retirement accounts (where the majority of my money is) for at least 30+ years. I'm also a big risk-seeker and completely comfortable with risk, both in life and in the market, so I can put up with all the swings - doesn't bother me one iota. Therefore I'm 100% equities with my 2 fund portfolio.

As Dave Ramsey says, "you only get hurt on the roller coaster if you jump off."
khangaroo,

Unless you can guarantee that you will be fully-employed over the next 30+ years and not affected by any recessions, your anticipation is useless. Life happened!

KlangFool

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