Volatility tolerance build up

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mushyyy
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Volatility tolerance build up

Post by mushyyy » Mon May 14, 2018 2:33 pm

My investing career started only few years ago, but nonetheless i’ve been able to create a mid six figure nest.
I have not experienced more than 15% drawdown in these years, but still..

I was reflecting on my emotions whenever I look at my portfolio, and I realized that just few years ago, a daily movement of >$1,000 was generating my attention (not action).

Fast forward to today, the average daily movement is close to my take home pay and I get zero stress from it.

It seems i’m training myself to get used to bigger and bigger swings. If I inherited 1M at day1, probably I would have struggled with market movements.

Did you notice the same?

If so, this begs the question: as emotional decisions represent one of the biggest drag to long term performance, could it make sense to increase the stocks allocation of 5-10% every few years?

This is contrary to standard BH principles of reducing risk towards retirement, but I wanted to throw a different perspective.

alex_686
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Re: Volatility tolerance build up

Post by alex_686 » Mon May 14, 2018 2:52 pm

mushyyy wrote:
Mon May 14, 2018 2:33 pm
If so, this begs the question: as emotional decisions represent one of the biggest drag to long term performance, could it make sense to increase the stocks allocation of 5-10% every few years?
Willingness to take risk and experience are linked.

But no, it does not make sense to increase your stock allocation every few years. Risk tolerance is based on need, ability, and willingness. As you get older your human capital diminishes, which for most people leads to a lower ability to take risks.

jminv
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Re: Volatility tolerance build up

Post by jminv » Mon May 14, 2018 3:08 pm

I think that it would make sense to increase your risk tolerance early in your investing career if you were not weighted heavily to stocks at that point in time but found yourself more risk tolerant than before.I don't think it would make sense if you were near retirement unless, perhaps, even after a severe drawdown at retirement day your lifestyle would be completely unaffected. This would be akin to Buffet's 90/10 stock index/bond recommendation to his wife if he were to pass which people here have rightly mentioned might be more appropriate for a very wealthy person comparatively minimal expenses than your average retiree who can't afford a major drawdown so close to retirement.

On your point about stock volatility/pain of losses, this bothered me when I was younger but now it doesn't bother me much at all. I still prefer gains to losses of course, but a 100k movement in a day makes me reflect the absurdity of where I am now versus where I was when I was growing up.

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jeffyscott
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Re: Volatility tolerance build up

Post by jeffyscott » Mon May 14, 2018 5:55 pm

Ask me again after the next 50% plus drop in stocks, combined with the possible end of the economy as we have known it. In over 20 years of investing, the only time I really felt a lot of stress about it was 2008-09.

The losses were about equal to about 1.5 year's income and by the end (and we did no know it was the end at the time) had lost all lifetime investment gains. Portfolio is about 3x what it was then and we have only a marginally lower percent in stocks 40% vs. 50% then.
press on, regardless - John C. Bogle

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willthrill81
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Re: Volatility tolerance build up

Post by willthrill81 » Mon May 14, 2018 6:36 pm

alex_686 wrote:
Mon May 14, 2018 2:52 pm
mushyyy wrote:
Mon May 14, 2018 2:33 pm
If so, this begs the question: as emotional decisions represent one of the biggest drag to long term performance, could it make sense to increase the stocks allocation of 5-10% every few years?
Willingness to take risk and experience are linked.

But no, it does not make sense to increase your stock allocation every few years. Risk tolerance is based on need, ability, and willingness. As you get older your human capital diminishes, which for most people leads to a lower ability to take risks.
The other aspect of this is that as you age, hopefully your portfolio is increasing in size. Humans don't just look at percentage losses; they also look at absolute dollars. It's a lot easier to take a 50% loss when you only have $1,000 invested to begin with than when you have $500k and watch a quarter of a million go poof.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: Volatility tolerance build up

Post by dbr » Mon May 14, 2018 7:02 pm

Two comments:

1) Risk should be determined by need, ability, and willingness, not just willingness. (as posted above)

2) It has also occurred to me that willingness should not just be an assessment of one's fears but also an education of one's fears, so I do agree somewhat with your idea. I'm not sure it is just building up tolerance but also understanding what can happen and how one should deal with it.

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Sandtrap
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Re: Volatility tolerance build up

Post by Sandtrap » Mon May 14, 2018 7:13 pm

mushyyy wrote:
Mon May 14, 2018 2:33 pm
My investing career started only few years ago, but nonetheless i’ve been able to create a mid six figure nest.
I have not experienced more than 15% drawdown in these years, but still..

I was reflecting on my emotions whenever I look at my portfolio, and I realized that just few years ago, a daily movement of >$1,000 was generating my attention (not action).

Fast forward to today, the average daily movement is close to my take home pay and I get zero stress from it.

It seems i’m training myself to get used to bigger and bigger swings. If I inherited 1M at day1, probably I would have struggled with market movements.

Did you notice the same?

If so, this begs the question: as emotional decisions represent one of the biggest drag to long term performance, could it make sense to increase the stocks allocation of 5-10% every few years?

This is contrary to standard BH principles of reducing risk towards retirement, but I wanted to throw a different perspective.
Isn't this similar to hitting one's hand with a hammer more often because it hurts less the more often you do it?

j

goingup
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Joined: Tue Jan 26, 2010 1:02 pm

Re: Volatility tolerance build up

Post by goingup » Mon May 14, 2018 7:21 pm

I might suggest to reserve your judgement about how risk tolerant you truly are. Overconfidence is a peril in long bull markets. The pullbacks you have seen in your investing career have been short. When the market tanks day after day for months it starts to feel as though it will never end.

That's why picking an AA and sticking to it is valuable. You've got a plan--just stay on course. :beer

Cyclesafe
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Re: Volatility tolerance build up

Post by Cyclesafe » Tue May 15, 2018 7:58 am

Frequent (weekly +) review of my total net worth - where it is in the moment, where it was, and where it might be - indeed has a numbing effect. I see where it has dipped in the past and remember my feelings then and have watched it recover and likewise. remember my feelings in those times. Some years I'm flat; some years I'm plus or minus a huge (for me) slug of money. And life goes on. Perspective.

The asset allocation regimen is a powerful tool to manage behavior.

dharrythomas
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Re: Volatility tolerance build up

Post by dharrythomas » Tue May 15, 2018 3:05 pm

It also might depend on whether your job has a defined benefit pension or not. After I locked in my Army Reserve pension, I felt free to take addition risk with my portfolio and with my career knowing that I had a solid floor below which my wife wouldn't fall in retirement regardless. A pension and a mortgage free home, give me the ability and willingness to take risk. Of course, they also cut the need to take risk.

Good look.

Fallible
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Re: Volatility tolerance build up

Post by Fallible » Tue May 15, 2018 6:04 pm

mushyyy wrote:
Mon May 14, 2018 2:33 pm
My investing career started only few years ago, but nonetheless i’ve been able to create a mid six figure nest.
I have not experienced more than 15% drawdown in these years, but still..

I was reflecting on my emotions whenever I look at my portfolio, and I realized that just few years ago, a daily movement of >$1,000 was generating my attention (not action).

Fast forward to today, the average daily movement is close to my take home pay and I get zero stress from it.

It seems i’m training myself to get used to bigger and bigger swings. If I inherited 1M at day1, probably I would have struggled with market movements.

Did you notice the same?

If so, this begs the question: as emotional decisions represent one of the biggest drag to long term performance, could it make sense to increase the stocks allocation of 5-10% every few years? ...
As I read this, you are asking whether increasing market experience has increased your risk tolerance and therefore justifies taking more risk. I think it’s hard to say because you’ve been investing only a few years in a record bull market, and testing one’s risk tolerance is probably best made in a market crash or over a much longer investing period. Under these circumstances, it's possible you're becoming overconfident in how much risk you can handle. Also, deciding on an asset allocation and how much risk you can and want to handle (willingness) should take into account how much you can afford to lose.

What is you current AA?
Last edited by Fallible on Tue May 15, 2018 6:23 pm, edited 1 time in total.
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bayview
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Re: Volatility tolerance build up

Post by bayview » Tue May 15, 2018 6:22 pm

Cyclesafe wrote:
Tue May 15, 2018 7:58 am
Frequent (weekly +) review of my total net worth - where it is in the moment, where it was, and where it might be - indeed has a numbing effect. I see where it has dipped in the past and remember my feelings then and have watched it recover and likewise. remember my feelings in those times. Some years I'm flat; some years I'm plus or minus a huge (for me) slug of money. And life goes on. Perspective.

The asset allocation regimen is a powerful tool to manage behavior.
+1

This has allowed me to build up volatility tolerance.

It certainly hasn't made me change my AA to take on more risk.

I chose our AA because of the amount of risk that made sense for us, in terms of the need and willingness. Even if my willingness had changed, the need and ability certainly haven't, so there is no reason to change the plan.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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