How did you determine risk tolerance?

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Robot Monster
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Re: How did you determine risk tolerance?

Post by Robot Monster »

Random Walker wrote: Mon Jul 27, 2020 9:37 am People especially concerned about an extended equity bear might want to consider diversification with an allocation to time series momentum.
I missed that class. Sounds complicated.
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SmileyFace
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Re: How did you determine risk tolerance?

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When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad. This got me through the dot-com and housing-crisis eras (well - dot-com I was buying a lot of tech-stocks that I took losses on - let's say that is when I learned to simply buy the full market and stop buying individual stocks - but I kept buying regardless).
Regarding presidential years - I read an article (can't find it now) that showed presidential elections don't actually create more turbulence contrary to what many believe. Most of the turbulence we have now is mostly due to uncertainty because of the pandemic - likely will continue for some time - but don't worry about it - just keep buying.
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Re: How did you determine risk tolerance?

Post by Chicken Little »

MissHavisham wrote: Fri Jul 24, 2020 8:24 pmAlso, In January of this year I had $25,000 and due to Covid it dropped to $13,500. Now it's back up. They say smooth seas never make a skilled sailor. Am I a sailor now?
You tell me.

You didn’t have a lot in the game, and it came right back. Doesn’t seem like much of a test?

The only people really tested in last twenty years were probably those who retired right before 2000, 2008, 2020, or those who lost their job in the aftermath.

That’s localized testing. National exams haven’t happened in quite while. When was last true capitulation?
Robot Monster
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price.
DCA is a bit like pretending you're in accumulation phase, isn't it? If grandpa leaves you a massive fortune, not a bad tactic, perhaps, to start "pretending"...?
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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SmileyFace
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Mon Jul 27, 2020 10:00 am
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price.
DCA is a bit like pretending you're in accumulation phase, isn't it? If grandpa leaves you a massive fortune, not a bad tactic, perhaps, to start "pretending"...?
If you receive a massive fortune you are better off just investing it all versus trying to play some DCA game. Many studies out there on this.
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Mon Jul 27, 2020 10:02 am
Robot Monster wrote: Mon Jul 27, 2020 10:00 am
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price.
DCA is a bit like pretending you're in accumulation phase, isn't it? If grandpa leaves you a massive fortune, not a bad tactic, perhaps, to start "pretending"...?
If you receive a massive fortune you are better off just investing it all versus trying to play some DCA game. Many studies out there on this.
What confuses me is how that argument squares with what you say above. Imagine someone just scraping by lump summing all of grandpa's fortune--they do have to worry about a big drop in value, and are not happy because they won't necessarily be able to take advantage of the lower stock price in a significant way. So, the worry-free environment you detail above is turned on its head, no? You kinda have to use another set of arguments in order to justify the lump sum, don't you?
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SmileyFace
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Mon Jul 27, 2020 10:27 am
DaftInvestor wrote: Mon Jul 27, 2020 10:02 am
Robot Monster wrote: Mon Jul 27, 2020 10:00 am
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price.
DCA is a bit like pretending you're in accumulation phase, isn't it? If grandpa leaves you a massive fortune, not a bad tactic, perhaps, to start "pretending"...?
If you receive a massive fortune you are better off just investing it all versus trying to play some DCA game. Many studies out there on this.
What confuses me is how that argument squares with what you say above. Imagine someone just scraping by lump summing all of grandpa's fortune--they do have to worry about a big drop in value, and are not happy because they won't necessarily be able to take advantage of the lower stock price in a significant way. So, the worry-free environment you detail above is turned on its head, no? You kinda have to use another set of arguments in order to justify the lump sum, don't you?
Same argument satisfies both: The key is that Time-In-Market always beats (statistically) trying to time the market.
If I am drawing a salary it works well not to stick money in a bank - wait until I think it is a good time to buy - then buy in. I am more likely to miss run-ups than I am to time my buys correctly (people talk about holding "dry powder here" - they hold it for a year or more - miss a run up of 15% but then get excited when they buy on a 10% dip). I am best to DCA the money in as I have it - time-in-market will likely beat trying to time the market.
If I suddenly come across a large sum of money I am also more likely to miss a run-up if I hold that money in a bank account and DCA it into the market. I am best off investing it the day I get it. If there is later a dip - I am in it for the long haul it will recover - but I am more likely to miss a run-up than to time-out the dip properly. Again - time-in-market will likely beat trying to time the market (through holding this large sum on the side and leak it in slowly).
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Re: Presidential Elections: How to stay calm?

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MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
...and then rebuy after a recovery? So "sell low, buy high"? That doesn't work well. Ignore that noise.


Risk tolerance. Use a total market portfolio. Use age in bonds to be conservative. Buy with money you will not need for 10yrs. Pray for a decades-long down market in your early years so you are buying investments "on sale". Ignore the noise.


People. As the population grows, so there are more people needing more goods/services, so businesses prosper by selling more goods/services, so the market is expected to rise over time. Only after there are no more people do you need to worry. Until then, ignore the noise.


Stability. Businesses adapt to stability. So no matter what political power is in office, and whatever brand of stability is (re)established, businesses will adapt. Ignore the noise.


Temporary market turmoil. If a temporary market turmoil gives you the opportunity to "buy low", then do so.


TLH. You can sell to take advantage of a TLH opportunity. But only buy a TLH partner that you could own for the long term. So you are never out of the market. So you avoid missing a quick market recovery.


Ignore the noise. Why? Because none of us knows enough to profit from it. So our outcome must be worse if we make the attempt.


Worry about your investments. The only time you need to worry about your investments is during periodic rebalancing---with new money or redirected distributions. You can minimize the need to interact with your investments by using all-in-one funds in your TA accounts to automate most of your rebalancing.


IPS. Create an Investment Policy Statement defining how you will invest. Review it periodically, and when the market upsets your emotions. The first item in your IPS needs to be "Ignore the noise." (Search Wiki for IPS.)
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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SmileyFace
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Re: Presidential Elections: How to stay calm?

Post by SmileyFace »

dratkinson wrote: Mon Jul 27, 2020 10:48 am
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
...and then rebuy after a recovery? So "sell low, buy high"? That doesn't work well. Ignore that noise.
"Know when to get out" and "Set limits" are usually techniques used with Individual stock speculating. They don't translate well to buying the entire market (which is the main theory we all follow here).
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Re: How did you determine risk tolerance?

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DaftInvestor wrote: Mon Jul 27, 2020 10:39 am
Robot Monster wrote: Mon Jul 27, 2020 10:27 am
DaftInvestor wrote: Mon Jul 27, 2020 10:02 am
Robot Monster wrote: Mon Jul 27, 2020 10:00 am
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price.
DCA is a bit like pretending you're in accumulation phase, isn't it? If grandpa leaves you a massive fortune, not a bad tactic, perhaps, to start "pretending"...?
If you receive a massive fortune you are better off just investing it all versus trying to play some DCA game. Many studies out there on this.
What confuses me is how that argument squares with what you say above. Imagine someone just scraping by lump summing all of grandpa's fortune--they do have to worry about a big drop in value, and are not happy because they won't necessarily be able to take advantage of the lower stock price in a significant way. So, the worry-free environment you detail above is turned on its head, no? You kinda have to use another set of arguments in order to justify the lump sum, don't you?
Same argument satisfies both: The key is that Time-In-Market always beats (statistically) trying to time the market.
If I am drawing a salary it works well not to stick money in a bank - wait until I think it is a good time to buy - then buy in. I am more likely to miss run-ups than I am to time my buys correctly (people talk about holding "dry powder here" - they hold it for a year or more - miss a run up of 15% but then get excited when they buy on a 10% dip). I am best to DCA the money in as I have it - time-in-market will likely beat trying to time the market.
If I suddenly come across a large sum of money I am also more likely to miss a run-up if I hold that money in a bank account and DCA it into the market. I am best off investing it the day I get it. If there is later a dip - I am in it for the long haul it will recover - but I am more likely to miss a run-up than to time-out the dip properly. Again - time-in-market will likely beat trying to time the market (through holding this large sum on the side and leak it in slowly).
That's fine, you can use this argument (nicely detailed), but like I said, seems a very different argument than worry-free argument you started with. That's the whole point of this thread, managing the worry factor, after all. The argument you outline is making a bet according to what most likely will happen. The worry factor centers around the converse of this, what is unlikely. I think that makes sense...who knows...maybe I'm full of it...off to lunch...
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cashboy
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Re: How did you determine risk tolerance?

Post by cashboy »

MissHavisham wrote: Fri Jul 24, 2020 8:24 pm Dear Bogleheads,

I'm a beginner and new to investing. This will be my first experience as an investor during a Presidential Election year. If the philosophy is to stay the course and hold steadfast, how do you actually do that during a Presidential Election year? or during any other turbulence? I would love to hear your past experiences, what happened to your portfolio and how you handled your emotions. Looking for some wisdom. I read a thread where people said they would read over their Investment Policy Statement.
it is a good idea to have an IPS that was written with a clear head during calm times. during times of crisis and uncertainty refer to it to remind yourself what you will do and why. in some ways it is a communication from your 'past self' to your 'current self'.


MissHavisham wrote: Fri Jul 24, 2020 8:24 pm Also, In January of this year I had $25,000 and due to Covid it dropped to $13,500. Now it's back up. They say smooth seas never make a skilled sailor. Am I a sailor now? Was COVID a big enough experience for anyone? For high net worth people, does losing $100,000's feel the same way as losing +/-?
a loss of 25% of the value of x (ex: small amount) or y (ex: large amount) feels the same (at least to me :wink: ).

MissHavisham wrote: Fri Jul 24, 2020 8:24 pm I've heard all about the "dot come era" and "housing crisis" but didn't have skin in the game. I want to condition myself to not listen to the noise, but is there a point that one should?
one can 'listen' to the 'noise' as long as one does not 'act' on it. i view it as 'entertainment'.
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)
nigel_ht
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Re: How did you determine risk tolerance?

Post by nigel_ht »

flaccidsteele wrote: Mon Jul 27, 2020 7:18 am
Robot Monster wrote: Sat Jul 25, 2020 5:15 pm
flaccidsteele wrote: Sat Jul 25, 2020 2:53 pm
Robot Monster wrote: Sat Jul 25, 2020 9:09 am
flaccidsteele wrote: Fri Jul 24, 2020 11:05 pm The US market always recovers. Always.

It’s never different this time. Ever.
What if the US market got as bubbly as Japan did at the end of 1989 when the Nikkei's CAPE reached 90? The S&P's CAPE all-time is 44.19, which it reached during the dot-com bubble. If the CAPE foamed up much higher than that, would this not open the door for stock market behavior we've never seen before? The Nikkei reached an all-time high of 38,957.44 in '89, and today it's at 22,751.61.
I don’t pay attention to “what if’s”.

Never have. Never will.

And I pay no attention to Japan
"We should get fire insurance."
"Why should we do that? The house has been standing for fifty years."
"Yes, okay, but what if it catches on fire? Don't you remember how the Johnson's house burnt down?"
"I don't pay attention to 'what if's'. And I pay no attention to the Johnson's."
Exactly 👍

The US always recovers. Always.

It’s never different this time. Ever.

How are you preparing for something that won’t happen?
1929 was 15 years peak to full recovery (reached the peak again). While you are investing new money in and will see that go up, all the money you had saved until that point was 0% returns for 15 years.

And someday it could happen to us but I believe it would require a few things to change first so there would likely be warning.
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Re: Presidential Elections: How to stay calm?

Post by dknightd »

DaftInvestor wrote: Mon Jul 27, 2020 10:52 am
dratkinson wrote: Mon Jul 27, 2020 10:48 am
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
...and then rebuy after a recovery? So "sell low, buy high"? That doesn't work well. Ignore that noise.
"Know when to get out" and "Set limits" are usually techniques used with Individual stock speculating. They don't translate well to buying the entire market (which is the main theory we all follow here).
I used the "determine risk questionnaires". I always came up as moderately aggressive. When I was younger I tended to be more conservative than what the questionnaires suggested. Because I did not want to loose money. That was a mistake, but it seemed the right thing to do at the time. Then I did about the 60/40 that they recommended for many years. Now I'm retired I have a separate bucket to see me through to claiming SS. So even though the questionnaires suggest I should still be moderately aggressive I'm actually a lot more conservative than that. I'm moderately aggressive with funds I do not need to live on.
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
To answer this question, yes I always had limits on investments. If something fell below what I wanted to own, I always bought more. But I was never invested much in any one company. If stocks fall I buy more, if stocks rise I sell some. It is called rebalancing.

Read the wiki. Boggleheads like a written investment plan. I never did that, my plan has always been in my head, but it is a good idea. Basically I revisited my investment plan every year or so. The plan can change with time.

The assumption is one day everything will make money. So you buy when things are cheap. Risk tolerance basically measures how much fluctuation you can tolerate before you change your plan. The goal I think is to not change your plan very often.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
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Re: How did you determine risk tolerance?

Post by Random Walker »

Robot Monster wrote: Mon Jul 27, 2020 9:43 am
Random Walker wrote: Mon Jul 27, 2020 9:37 am People especially concerned about an extended equity bear might want to consider diversification with an allocation to time series momentum.
I missed that class. Sounds complicated.
If you’re interested, take a look at this. I think it’s also relevant to the the recent thread on sequence of returns risk.
https://images.aqr.com/-/media/AQR/Docu ... l-2017.pdf

Especially take a look at the “smile curve” exhibit 5

Dave
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Re: How did you determine risk tolerance?

Post by dknightd »

I think perhaps there are two different issues being discussed here. One is to have enough to perhaps retire on. The other is to hopefully generate more than you need. I'm in both camps. But my priority is to have enough to retire on. I do not want my kids to need to help support me. If I end up with more than I need the kids get an edge up. But they will not know what that might be till after we both die. I've told them to expect 0. That is what I expect from my parents.
I also think risk tolerance depends on what you need the money for. I do not want to risk not having a place to live or food to eat. But I am willing to risk not having a nice vacation.
Risk tolerance is highly personal. You could risk and win. Or you could risk and loose. As long as you are young and have a job you could always save more ;)
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
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SmileyFace
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Random Walker wrote: Mon Jul 27, 2020 11:36 am
Robot Monster wrote: Mon Jul 27, 2020 9:43 am
Random Walker wrote: Mon Jul 27, 2020 9:37 am People especially concerned about an extended equity bear might want to consider diversification with an allocation to time series momentum.
I missed that class. Sounds complicated.
If you’re interested, take a look at this. I think it’s also relevant to the the recent thread on sequence of returns risk.
https://images.aqr.com/-/media/AQR/Docu ... l-2017.pdf

Especially take a look at the “smile curve” exhibit 5

Dave
Thanks for sharing this paper David - looks interesting - took a scan - will take a read when time allows. While I always find your posts of interest, I do find your username to be ironic - I wouldn't expect someone who believes we are on a random-walk to always be seeking factor-investment options to obtain a leg-up.
Robot Monster
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
Random Walker
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Re: How did you determine risk tolerance?

Post by Random Walker »

DaftInvestor wrote: Mon Jul 27, 2020 12:41 pm
Random Walker wrote: Mon Jul 27, 2020 11:36 am
Robot Monster wrote: Mon Jul 27, 2020 9:43 am
Random Walker wrote: Mon Jul 27, 2020 9:37 am People especially concerned about an extended equity bear might want to consider diversification with an allocation to time series momentum.
I missed that class. Sounds complicated.
If you’re interested, take a look at this. I think it’s also relevant to the the recent thread on sequence of returns risk.
https://images.aqr.com/-/media/AQR/Docu ... l-2017.pdf

Especially take a look at the “smile curve” exhibit 5

Dave
Thanks for sharing this paper David - looks interesting - took a scan - will take a read when time allows. While I always find your posts of interest, I do find your username to be ironic - I wouldn't expect someone who believes we are on a random-walk to always be seeking factor-investment options to obtain a leg-up.
DaftInvestor,
Thanks for taking note of my username. The first book that I read was Bogle’s Common Sense On Mutual Funds, but the book that really got my attention was Malkiel’s Random Walk Down Wall Street. The term random walk got my attention because I had first learned the term in biochemistry: it describes the movement of bacteria before they lock on to a chemo attractant. When I envision markets I see buying and selling as chemical equilibrium in Chemistry 1 or the lines nicely intersecting in the Econ 1 model of perfect competition. So I have a strong bias towards major league belief in market efficiency, and thus the TSM approach.
So I myself am surprised at how my investment approach has evolved. Although my portfolio is very far from TSM, I think it still nonetheless reflects a belief in highly (but not perfectly) efficient markets and passive investing. I think my strong tilt to SV is more about diversifying across unique and independent sources of risk than it is looking for a market beating free lunch. I believe an efficient market should result in about the same risk adjusted returns for all investments, but more risky investments should have higher overall expected returns. I’m 50/50 US/Int, reflecting my belief in worldwide market efficiency.
I would say my portfolio has evolved not in an effort to get a leg up on an efficient market, but rather to build a more efficient portfolio. I think there is a difference between an efficient portfolio and an efficient market. I don’t understand how the experts say TSM is always on the efficient frontier. Modern Portfolio Theory is a distinct issue from belief in efficient markets. A big influence on me is Roger Gibson’s Asset Allocation: Balancing Financial Risk. So, although my portfolio is miles away from a TSM portfolio, I believe it still reflects a strong belief in market efficiency: I view it as passive with no market timing or individual security selection.
There are two areas where I have clearly deviated away from the chemical equilibrium view of market efficiency. The first is value. As you know, there are both strong risk based and behavioral based explanations for value. I started out believing overwhelmingly in the risk based component. Over time I find myself believing more and more in the behavioral component. The second area is momentum, both time series and cross sectional. Momentum is purely behavioral. At some point the data just appeared so strong that it overrode my bias towards belief in perfect market efficiency. As this past weekends WSJ article “We’re All Day Traders Now” showed, human behavior is tenaciously persistent.
So you’re right, at this point my name can seem ironic, but perhaps less so than on initial impression. I began BH TSM type investing after the dot com debacle in 2001. I converted to the higher cost torqued approach in 2009. I must admit that at least to this point, I think I’d be richer if had stayed the TSMish course. But my intent is to achieve my goals, not win a contest. I still am a strong believer in market efficiency and passive investing. I am tuned into my own potential to make behavioral errors. And I’ve evolved to believe that human investors are consistently prone to some behavioral foibles.

Dave
Dennisl
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Re: How did you determine risk tolerance?

Post by Dennisl »

I started at 60/40. Have 25 years left until I retire. I felt fine in March and increased allocation to 70/30. Will probably slowly decrease allocation as time goes by. Not going higher than 70/30. I think it’s reasonable to start more conservatively and test out a downturn. Easier in 401k to make changes without tax implications. I agree w people who say never sell. The one caveat is for tax loss harvesting.
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Re: Presidential Elections: How to stay calm?

Post by flaccidsteele »

MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
I like this idea but haven’t found a way to implement it

I typically start paying attention when the media says that we are in a bear market. I would appreciate a better way as well
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Presidential Elections: How to stay calm?

Post by flaccidsteele »

quantAndHold wrote: Fri Jul 24, 2020 9:09 pm
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
Yeah, it’s a stop loss order. Don’t do that. All that does is sell you out when the market is at a low point. You don’t want that.
How about setting something up to do the opposite? If the market falls by a certain amount start buying with the cash at a predetermined rate
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Presidential Elections: How to stay calm?

Post by Robot Monster »

flaccidsteele wrote: Mon Jul 27, 2020 7:09 pm
quantAndHold wrote: Fri Jul 24, 2020 9:09 pm
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
Yeah, it’s a stop loss order. Don’t do that. All that does is sell you out when the market is at a low point. You don’t want that.
How about setting something up to do the opposite? If the market falls by a certain amount start buying with the cash at a predetermined rate
I know someone who's doing that. Their cash is currently waiting on the S&P to fall to 2550. That cash might be in for a long wait. Hope the settlement fund waiting room has lots of magazines and comfy couches.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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SmileyFace
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
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Re: Presidential Elections: How to stay calm?

Post by nigel_ht »

Robot Monster wrote: Tue Jul 28, 2020 9:15 am
flaccidsteele wrote: Mon Jul 27, 2020 7:09 pm
quantAndHold wrote: Fri Jul 24, 2020 9:09 pm
MissHavisham wrote: Fri Jul 24, 2020 8:54 pm I guess what I am curious about is I heard some people say you should put like a limit on your stuff, that triggers something if it falls a certain amount. Does anyone here do that?
Yeah, it’s a stop loss order. Don’t do that. All that does is sell you out when the market is at a low point. You don’t want that.
How about setting something up to do the opposite? If the market falls by a certain amount start buying with the cash at a predetermined rate
I know someone who's doing that. Their cash is currently waiting on the S&P to fall to 2550. That cash might be in for a long wait. Hope the settlement fund waiting room has lots of magazines and comfy couches.
Well you could park it in bonds and then move to an aggressive AA if see a drop. Say 50/50 and then as the crash happens shift to 60/40 at 20% down, 70/30 at 40% down , 80/20 at 60% down.

Risky though if the Nikkei or 1929 happens...
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Re: How did you determine risk tolerance?

Post by nigel_ht »

DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
Because over the long haul Lump Sum beats DCA 2/3rd of the time. On the other hand, with the markets as they are where they can go up or crash because of external circumstances then likely the odds are better for DCA to break even or outperform Lump Sum and gives you short term downside protection during the period of uncertainty.
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Re: How did you determine risk tolerance?

Post by SmileyFace »

nigel_ht wrote: Tue Jul 28, 2020 10:46 am
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
Because over the long haul Lump Sum beats DCA 2/3rd of the time. On the other hand, with the markets as they are where they can go up or crash because of external circumstances then likely the odds are better for DCA to break even or outperform Lump Sum and gives you short term downside protection during the period of uncertainty.
So based upon your "On the other hand" statement - are you pulling all your investments out and DCA'ing back in? This is essentially the same thing as getting a lump-sum windfall and deciding to DCA. (We are always in a "period of uncertainty" BTW - over one thing or another).
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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Re: How did you determine risk tolerance?

Post by nigel_ht »

DaftInvestor wrote: Tue Jul 28, 2020 10:54 am
nigel_ht wrote: Tue Jul 28, 2020 10:46 am
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
Because over the long haul Lump Sum beats DCA 2/3rd of the time. On the other hand, with the markets as they are where they can go up or crash because of external circumstances then likely the odds are better for DCA to break even or outperform Lump Sum and gives you short term downside protection during the period of uncertainty.
So based upon your "On the other hand" statement - are you pulling all your investments out and DCA'ing back in? This is essentially the same thing as getting a lump-sum windfall and deciding to DCA. (We are always in a "period of uncertainty" BTW - over one thing or another).
I don't have to because I am halfway through a DCA at the moment. Also, I'm going into a 50/50 AA deliberately because the current economic circumstances are iffy where my normal risk tolerance is more 70/30 even this close to retirement. Should the market tank, I'll go to a more aggressive AA as high as 90/10. Once we're pretty well into the early cycle of the next bull then I'll likely go 70/30ish.

If we end up in Nikkei scenario...well, oops.
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
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Re: How did you determine risk tolerance?

Post by hudson »

MissHavisham wrote: Fri Jul 24, 2020 8:24 pm Dear Bogleheads,

I'm a beginner and new to investing.
Years ago, I took a survey and it said I would be fine with 100% stocks. Then the panic of 2008 happened and I went 100% fixed.
Don't follow my lead unless it fits your situation.

Consider reading these Boglehead books if you haven't already....Four Pillars first:

viewtopic.php?p=5372762#p5372762
nigel_ht
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Re: How did you determine risk tolerance?

Post by nigel_ht »

Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
DCA provides more time in market if you follow the BH wiki advice of not doing anything financially significant for 6 months to a year after a large windfall.

If you want you can likely start a DCA into 50/50 and still have enough time to get to your desired AA once you figure out what you determine your long term risk tolerance is vs doing a lump sum six months to a year later. It gives you time to build your financial support team (CPA, lawyer, etc) and long term planning while getting a little something in the market.

A $20M windfall is a game changer for most folks. There's also likely a grieving process.
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Re: How did you determine risk tolerance?

Post by nigel_ht »

DaftInvestor wrote: Tue Jul 28, 2020 1:03 pm
Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
Inflation over 1 year isn't a deal killer vs making a large financial mistake of some kind.

https://www.bogleheads.org/wiki/Managing_a_windfall

"Do nothing rash. Set aside one year's living expenses and place the rest of the windfall into low risk investments (FDIC insured accounts, money market funds, treasury bills) for one year. As it may take as long as five years for the windfall recipient to adjust to a new life, this pause provides a chance for emotions to cool, helps avoid impulsive behavior, and, if warranted, allows the recipient time to put together a team of professional advisers. Then, create a detailed plan to meet your highest priority financial goals, and track your progress over the years."
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SmileyFace
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Re: How did you determine risk tolerance?

Post by SmileyFace »

nigel_ht wrote: Tue Jul 28, 2020 1:20 pm
DaftInvestor wrote: Tue Jul 28, 2020 1:03 pm
Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm

Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
Inflation over 1 year isn't a deal killer vs making a large financial mistake of some kind.

https://www.bogleheads.org/wiki/Managing_a_windfall

"Do nothing rash. Set aside one year's living expenses and place the rest of the windfall into low risk investments (FDIC insured accounts, money market funds, treasury bills) for one year. As it may take as long as five years for the windfall recipient to adjust to a new life, this pause provides a chance for emotions to cool, helps avoid impulsive behavior, and, if warranted, allows the recipient time to put together a team of professional advisers. Then, create a detailed plan to meet your highest priority financial goals, and track your progress over the years."
That advise is for folks who don't know anything about investments/money. I wouldn't expect a Boglehead to follow this advise - a Boglehead should know that their best course of action is to invest this money using their IPS - which might be a 3-fund portfolio. If you know your risk tolerance, and have yourself in a given Asset-Allocation - why do you want to lose money for a year?
Again - it's like saying "I just realized I am so risk averse I am no longer comfortable with the money I have saved to date, I will pull it all out and DCA it back in".
Robot Monster
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Tue Jul 28, 2020 1:03 pm
Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm
DaftInvestor wrote: Mon Jul 27, 2020 9:49 am When you are in the "Accumulation Phase" of life you simply keep accumulating. You don't worry too much of drops in value in what you have already accumulated. If the market drops you should be happy because it allows you to accumulate more at the same price. You know the market will someday turn back around - just keep buying same dollar amounts in good and bad.
Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
Yes, the millions will sadly sit in Vanguard Treasury Money Market, and will undoubtedly be nibbled away year after year by inflation, all because of Laura's psychological risk intolerance, the fact that if she put a substantial more in the market it would impact her peace of mind very substantially. Laura figures she'll be able to get by, even if the cash gets eaten away by inflation. (She does worry about hyperinflation, but let's not open up that can of worms.) I might add, Aunt May actually enjoys rolling in her grave--it's good cardio.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
nigel_ht
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Re: How did you determine risk tolerance?

Post by nigel_ht »

DaftInvestor wrote: Tue Jul 28, 2020 1:28 pm
nigel_ht wrote: Tue Jul 28, 2020 1:20 pm
DaftInvestor wrote: Tue Jul 28, 2020 1:03 pm
Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am

So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
Inflation over 1 year isn't a deal killer vs making a large financial mistake of some kind.

https://www.bogleheads.org/wiki/Managing_a_windfall

"Do nothing rash. Set aside one year's living expenses and place the rest of the windfall into low risk investments (FDIC insured accounts, money market funds, treasury bills) for one year. As it may take as long as five years for the windfall recipient to adjust to a new life, this pause provides a chance for emotions to cool, helps avoid impulsive behavior, and, if warranted, allows the recipient time to put together a team of professional advisers. Then, create a detailed plan to meet your highest priority financial goals, and track your progress over the years."
That advise is for folks who don't know anything about investments/money. I wouldn't expect a Boglehead to follow this advise - a Boglehead should know that their best course of action is to invest this money using their IPS - which might be a 3-fund portfolio. If you know your risk tolerance, and have yourself in a given Asset-Allocation - why do you want to lose money for a year?
Again - it's like saying "I just realized I am so risk averse I am no longer comfortable with the money I have saved to date, I will pull it all out and DCA it back in".
The wiki has no indicator it’s not for bogleheads.

You don’t really know until you go through it. I’m going through it and it’s actually pretty good advice.

There is a difference between getting a windfall of some fraction of your net worth vs getting a windfall of some multiple of your net worth.

What you can and should do changes. Risk tolerance changes. Retirement moved from 10 years to anytime I want...but retiring turned out not to be the best thing right now. The retirement planning and goals I had have changed. I have a new financial team and a new IPS to match new long term goals.

Lump summing in January and retiring would have been the wrong course of action so I’m glad I waited. Instead I captured some of the gains this March through DCA, shifted to a more conservative AA after thinking about it and kept working part time.

But hey, you know everything about investing so if the time comes just jump in and do your thing. That should work out just fine.
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Re: How did you determine risk tolerance?

Post by SmileyFace »

nigel_ht wrote: Tue Jul 28, 2020 4:59 pm But hey, you know everything about investing so if the time comes just jump in and do your thing. That should work out just fine.
I NEVER said I knew everything about investing (did you not take note of my username). I do know how to use google however - and if you google "Lump sum versus DCA" you will find various studies by various institutions (including Vanguard) have shown that you are better off lump sum investing versus holding and DCA'ing. I was merely pointing that out to try to help others. But you don't need to listen to me - nor do you need to do research - do what you'd like and are comfortable with. What you really should be asking yourself (and getting back to original question) is if you are afraid to invest maybe your AA doesn't match your risk tolerance- maybe a low equity holding - a 10/90 ratio - is right for you - and for some people that is okay.
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Re: How did you determine risk tolerance?

Post by alluringreality »

DaftInvestor wrote: Wed Jul 29, 2020 6:48 am if you google "Lump sum versus DCA" you will find various studies by various institutions (including Vanguard) have shown that you are better off lump sum investing versus holding and DCA'ing.
Everyone does not necessarily need to determine how to proceed based entirely on average performance. Since the newer paper doesn't seem to be working right now, here is a comment from the older paper.

Even though LSI’s average outperformance and risk-adjusted returns have been greater than those of DCA, risk-averse investors may be less concerned about averages than they are about worst-case scenarios, as well as the potential feelings of regret that would occur if a lump-sum investment were made immediately prior to a market decline. These concerns are not unreasonable. We found that DCA performed better during market downturns, so DCA may be a logical alternative for investors who prefer some short-term downside protection.
https://static.twentyoverten.com/5980d1 ... nguard.pdf
Last edited by alluringreality on Wed Jul 29, 2020 7:37 am, edited 1 time in total.
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Tue Jul 28, 2020 3:18 pm
DaftInvestor wrote: Tue Jul 28, 2020 1:03 pm
Robot Monster wrote: Tue Jul 28, 2020 12:39 pm
DaftInvestor wrote: Tue Jul 28, 2020 10:35 am
Robot Monster wrote: Mon Jul 27, 2020 1:39 pm

Thinking more about this. What you outlined above does seem worry-free. Speaking as someone extremely risk intolerant, this is appealing to me. If I can add more to the stock market without adding worry...that is very much of interest.

Lump-sum a windfall is packed with worry: the worry of lump summing right before an extreme 30 year downturn (yes, of a global portfolio....not impossible). This is not a problem for the DCA process you outlined above.

What I conclude is your DCA process is a viable option over lump-sum for risk-intolerant investors who do not want to even take the slightest chance of enduring the psychological torment of lump summing before an extreme, extravagantly prolonged downturn.
So if you believe you are better off investing a lump-sum over time using DCA; why wouldn't you also use that theory to take all your money out of the market at a high and then DCA it back in? Think about this and it might change your thinking about a lump-sum investment obtained in a windfall.
I don't want to take any money out of the market that I'm comfortable having in, so that's the reason I wouldn't want to yank all of my money out now, or under any circumstance.

Let's take the example of Laura, 46 years old. She inherits $20,000,000 from her beloved Aunt May, and can only bear to invest 5% of that in stocks, so on this very day she invests $1,000,000 in Total World ETF, despite the fact she would, in a way, like to invest much more (afraid because of the nightmare 'extreme 30 year downturn' scenario). If a year from now VT rises by 50%, she'll be comfortable with that now larger amount of money at risk because the additional money at risk is not from Aunt May's principal.
But unfortunately she has lost some of Aunt May's principal to inflation - and the opportunity cost of holding that much in cash is insane - she really kept $19,000,000 in some bank account that didn't keep up with inflation? Aunt May didn't amass this money by keeping it in cash. Aunt May would likely be rolling in her grave with such foolishness of her legacy :) Look at how much she has now lost by not investing it. Very sad indeed.
AND the market rose by 50%! Wow - what a lost opportunity.
Yes, the millions will sadly sit in Vanguard Treasury Money Market, and will undoubtedly be nibbled away year after year by inflation, all because of Laura's psychological risk intolerance, the fact that if she put a substantial more in the market it would impact her peace of mind very substantially. Laura figures she'll be able to get by, even if the cash gets eaten away by inflation. (She does worry about hyperinflation, but let's not open up that can of worms.) I might add, Aunt May actually enjoys rolling in her grave--it's good cardio.
But if Laura simply tossed $1M into VTI and said "let's see how this goes" as you stated - and made 50% after 1 year - she might then think "WHO-HOO - this investment is great - I am going all in!" The reason not to invest right away should have nothing to do with "Lump Sum" versus "DCA". The reason is that Laura needs to educate herself.
What Laura should have done? It would be fine and prudent to take a pause. Laura needs to do some reading and research. Maybe Laura doesn't have an IPS - doesn't even know what an AA is. Laura needs to determine her risk tolerance. Laura needs to write an IPS once she has decided on an AA. Laura might then do enough reading during this research pause to come across studies showing she is better off investing into her AA sooner rather than later.
If your risk tolerance is such that you are hesitant to invest all in one Lump Sum - you really need to ask yourself if you actually have the right AA for your risk tolerance.
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Re: How did you determine risk tolerance?

Post by SmileyFace »

alluringreality wrote: Wed Jul 29, 2020 7:35 am
DaftInvestor wrote: Wed Jul 29, 2020 6:48 am if you google "Lump sum versus DCA" you will find various studies by various institutions (including Vanguard) have shown that you are better off lump sum investing versus holding and DCA'ing.
Everyone does not necessarily need to determine how to proceed based entirely on average performance. Since the newer paper doesn't seem to be working right now, here is a comment from the older paper.

Even though LSI’s average outperformance and risk-adjusted returns have been greater than those of DCA, risk-averse investors may be less concerned about averages than they are about worst-case scenarios, as well as the potential feelings of regret that would occur if a lump-sum investment were made immediately prior to a market decline. These concerns are not unreasonable. We found that DCA performed better during market downturns, so DCA may be a logical alternative for investors who prefer some short-term downside protection.
https://static.twentyoverten.com/5980d1 ... nguard.pdf
If I follow this logic, once I have a lot invested and see the market is "High" and news is "Dire" I might similarly be nervous since I am risk-averse and want to pull everything out and DCA back in for the same downturn protection. Unfortunately we see a lot of people post here who have done such a thing and then regretted it on missing the run-ups (I only saw one post where someone actually hit is correctly! Timed the exit before pandemic fall-out nearly perfectly. But for that 1 there are numerous in the other direction). I believe one is better off taking a pause to determine what the right Asset Allocation is for their risk tolerance rather than trying to decide or get a feel for it through DCA'ing which is what some of these statements suggest to me.
Maybe I am just too statistically oriented.
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Wed Jul 29, 2020 7:36 am But if Laura simply tossed $1M into VTI and said "let's see how this goes" as you stated - and made 50% after 1 year - she might then think "WHO-HOO - this investment is great - I am going all in!" The reason not to invest right away should have nothing to do with "Lump Sum" versus "DCA". The reason is that Laura needs to educate herself.
What Laura should have done? It would be fine and prudent to take a pause. Laura needs to do some reading and research. Maybe Laura doesn't have an IPS - doesn't even know what an AA is. Laura needs to determine her risk tolerance. Laura needs to write an IPS once she has decided on an AA. Laura might then do enough reading during this research pause to come across studies showing she is better off investing into her AA sooner rather than later.
If your risk tolerance is such that you are hesitant to invest all in one Lump Sum - you really need to ask yourself if you actually have the right AA for your risk tolerance.
All fair points, and let me just say I very much appreciate you taking the time with this. Okay, so, as far as Laura's goals and strategy, this is it in a nutshell:

Laura wants to generate an inflation-adjusted yearly income of $75,000. She has created a spreadsheet that shows, using a pessimistic 4% inflation rate for the next 60 years, and zero interest income, $19,000,000 will last her till she's 106 years old. This isn't even using the million in stocks. So, these calculations lead her to conclude she doesn't need more stocks. However, there are problems with Laura's plan:

1. She's keeping too many eggs in one basket, i.e. in cash. This, just in general principal, seems like a bad thing to do.
2. What if Laura isn't being pessimistic enough regarding the 4% inflation/zero interest scenario? What if there is crazy inflation coupled with crazy negative interest rates? What about wealth taxes?

Laura isn't sure how to approach this. One the one hand she would like to diversify, on the other she is scared of risk assets. It is something of a quandary.
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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Re: How did you determine risk tolerance?

Post by nigel_ht »

DaftInvestor wrote: Wed Jul 29, 2020 7:54 am
alluringreality wrote: Wed Jul 29, 2020 7:35 am
DaftInvestor wrote: Wed Jul 29, 2020 6:48 am if you google "Lump sum versus DCA" you will find various studies by various institutions (including Vanguard) have shown that you are better off lump sum investing versus holding and DCA'ing.
Everyone does not necessarily need to determine how to proceed based entirely on average performance. Since the newer paper doesn't seem to be working right now, here is a comment from the older paper.

Even though LSI’s average outperformance and risk-adjusted returns have been greater than those of DCA, risk-averse investors may be less concerned about averages than they are about worst-case scenarios, as well as the potential feelings of regret that would occur if a lump-sum investment were made immediately prior to a market decline. These concerns are not unreasonable. We found that DCA performed better during market downturns, so DCA may be a logical alternative for investors who prefer some short-term downside protection.
https://static.twentyoverten.com/5980d1 ... nguard.pdf
If I follow this logic, once I have a lot invested and see the market is "High" and news is "Dire" I might similarly be nervous since I am risk-averse and want to pull everything out and DCA back in for the same downturn protection. Unfortunately we see a lot of people post here who have done such a thing and then regretted it on missing the run-ups (I only saw one post where someone actually hit is correctly! Timed the exit before pandemic fall-out nearly perfectly. But for that 1 there are numerous in the other direction). I believe one is better off taking a pause to determine what the right Asset Allocation is for their risk tolerance rather than trying to decide or get a feel for it through DCA'ing which is what some of these statements suggest to me.
Maybe I am just too statistically oriented.
The "pull everything out and DCA in" argument is old and tired. So is ignoring that some periods are more risky than others. With a once in a lifetime large windfall it makes sense to be more conservative because 99% of the time you have "won the game" and are now FI if you weren't before. Even if you were FI, now you're in position to do more than you expected.

Either wait for uncertainty to pass as you get used to your new normal or DCA into a conservative AA if you want more time in market where you can still reach your final AA in the last six month by putting the remainder of the windfall into that asset. The types of assets you wish to invest in may have changed too with more hard real estate or gold or whatever beyond a 3 fund.

This topic is tangential to what the OP asked but it does show that risk tolerance isn't static and changes based on personal circumstances.
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Re: How did you determine risk tolerance?

Post by Mr.BB »

Tolerance is usually dictated by how close to retirement you are and how long you have to recover from your losses;as well as how much you have saved already. Other factors also include what you have for a swr rate as well as how much of your portfolio is going to be guaranteed income (SS, pension).
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."
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Re: How did you determine risk tolerance?

Post by nigel_ht »

Robot Monster wrote: Wed Jul 29, 2020 9:07 am
DaftInvestor wrote: Wed Jul 29, 2020 7:36 am But if Laura simply tossed $1M into VTI and said "let's see how this goes" as you stated - and made 50% after 1 year - she might then think "WHO-HOO - this investment is great - I am going all in!" The reason not to invest right away should have nothing to do with "Lump Sum" versus "DCA". The reason is that Laura needs to educate herself.
What Laura should have done? It would be fine and prudent to take a pause. Laura needs to do some reading and research. Maybe Laura doesn't have an IPS - doesn't even know what an AA is. Laura needs to determine her risk tolerance. Laura needs to write an IPS once she has decided on an AA. Laura might then do enough reading during this research pause to come across studies showing she is better off investing into her AA sooner rather than later.
If your risk tolerance is such that you are hesitant to invest all in one Lump Sum - you really need to ask yourself if you actually have the right AA for your risk tolerance.
All fair points, and let me just say I very much appreciate you taking the time with this. Okay, so, as far as Laura's goals and strategy, this is it in a nutshell:

Laura wants to generate an inflation-adjusted yearly income of $75,000. She has created a spreadsheet that shows, using a pessimistic 4% inflation rate for the next 60 years, and zero interest income, $19,000,000 will last her till she's 106 years old. This isn't even using the million in stocks. So, these calculations lead her to conclude she doesn't need more stocks. However, there are problems with Laura's plan:

1. She's keeping too many eggs in one basket, i.e. in cash. This, just in general principal, seems like a bad thing to do.
2. What if Laura isn't being pessimistic enough regarding the 4% inflation/zero interest scenario? What if there is crazy inflation coupled with crazy negative interest rates? What about wealth taxes?

Laura isn't sure how to approach this. One the one hand she would like to diversify, on the other she is scared of risk assets. It is something of a quandary.

$75K is a 0.357% WR...anything aside from burying it under the pool in the backyard works. $75K for 60 years is $4.5M. Park $5M in TIPS and do whatever with the remaining $15M.

If there is ever a wealth tax she can afford to buy a new citizenship, pay the exit tax (if there is one) and renounce her US citizenship. More likely is that it would be tied up in the courts until she is gone anyway.
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Re: How did you determine risk tolerance?

Post by Robot Monster »

nigel_ht wrote: Wed Jul 29, 2020 9:59 am
Robot Monster wrote: Wed Jul 29, 2020 9:07 am
DaftInvestor wrote: Wed Jul 29, 2020 7:36 am But if Laura simply tossed $1M into VTI and said "let's see how this goes" as you stated - and made 50% after 1 year - she might then think "WHO-HOO - this investment is great - I am going all in!" The reason not to invest right away should have nothing to do with "Lump Sum" versus "DCA". The reason is that Laura needs to educate herself.
What Laura should have done? It would be fine and prudent to take a pause. Laura needs to do some reading and research. Maybe Laura doesn't have an IPS - doesn't even know what an AA is. Laura needs to determine her risk tolerance. Laura needs to write an IPS once she has decided on an AA. Laura might then do enough reading during this research pause to come across studies showing she is better off investing into her AA sooner rather than later.
If your risk tolerance is such that you are hesitant to invest all in one Lump Sum - you really need to ask yourself if you actually have the right AA for your risk tolerance.
All fair points, and let me just say I very much appreciate you taking the time with this. Okay, so, as far as Laura's goals and strategy, this is it in a nutshell:

Laura wants to generate an inflation-adjusted yearly income of $75,000. She has created a spreadsheet that shows, using a pessimistic 4% inflation rate for the next 60 years, and zero interest income, $19,000,000 will last her till she's 106 years old. This isn't even using the million in stocks. So, these calculations lead her to conclude she doesn't need more stocks. However, there are problems with Laura's plan:

1. She's keeping too many eggs in one basket, i.e. in cash. This, just in general principal, seems like a bad thing to do.
2. What if Laura isn't being pessimistic enough regarding the 4% inflation/zero interest scenario? What if there is crazy inflation coupled with crazy negative interest rates? What about wealth taxes?

Laura isn't sure how to approach this. One the one hand she would like to diversify, on the other she is scared of risk assets. It is something of a quandary.

$75K is a 0.357% WR...anything aside from burying it under the pool in the backyard works. $75K for 60 years is $4.5M. Park $5M in TIPS and do whatever with the remaining $15M.

If there is ever a wealth tax she can afford to buy a new citizenship, pay the exit tax (if there is one) and renounce her US citizenship. More likely is that it would be tied up in the courts until she is gone anyway.
You think it'll be okay if Laura DCAs into TIPS?
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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Re: How did you determine risk tolerance?

Post by DSBH »

Interesting question. What I have learned - correctly and/or incorrectly - and continued to learn new things every day - about financial risk tolerance can be generally described in 3 parts: risk, tolerance, and mitigation.

Risk: to me, the uncertainty of not having (enough) money when you really need it due to unexpected as well as expected events - in the short (e.g. job loss), medium (e.g. kids' college fund), and longer term (e.g. retirement).

Tolerance: how much pain - financially (e.g. borrow from credit card at 20% interest), mentally (e.g. going crazy when stock market tanks), and physically (e.g. loss of sleep thinking about having to sell stocks when market is down) among others - you're willing to endure if such event(s) happens.

Mitigation: once I think that I somewhat understand my financial risk tolerance, then I research on mitigation strategies from knowledgeable people and use them as applicable to my situation. For instance, saving in safe investment to establish emergency fund to address short-term risk (and reduce the risk of have to sell stocks when market is down), and investing in higher return / higher volatility stock/bond to address medium and long-term concerns.

There are plenty of good advice already about how to handle market volatility so I just wanted to mention that I'd like to keep an eye on my medium/long term goal(s) and mostly try to ignore the volatility in the process since I don't gain or lose unless I sell - kind of a risk mitigation strategy that improves tolerance. Easier said than done I realize, since I was pretty nervous during periods of Black Monday in 1987, March 2000 etc. It may help also to consider switching to a more conservative investing strategy when you're getting close to your mid/long term goal(s).
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Re: How did you determine risk tolerance?

Post by SmileyFace »

Robot Monster wrote: Wed Jul 29, 2020 10:14 am
nigel_ht wrote: Wed Jul 29, 2020 9:59 am
Robot Monster wrote: Wed Jul 29, 2020 9:07 am
DaftInvestor wrote: Wed Jul 29, 2020 7:36 am But if Laura simply tossed $1M into VTI and said "let's see how this goes" as you stated - and made 50% after 1 year - she might then think "WHO-HOO - this investment is great - I am going all in!" The reason not to invest right away should have nothing to do with "Lump Sum" versus "DCA". The reason is that Laura needs to educate herself.
What Laura should have done? It would be fine and prudent to take a pause. Laura needs to do some reading and research. Maybe Laura doesn't have an IPS - doesn't even know what an AA is. Laura needs to determine her risk tolerance. Laura needs to write an IPS once she has decided on an AA. Laura might then do enough reading during this research pause to come across studies showing she is better off investing into her AA sooner rather than later.
If your risk tolerance is such that you are hesitant to invest all in one Lump Sum - you really need to ask yourself if you actually have the right AA for your risk tolerance.
All fair points, and let me just say I very much appreciate you taking the time with this. Okay, so, as far as Laura's goals and strategy, this is it in a nutshell:

Laura wants to generate an inflation-adjusted yearly income of $75,000. She has created a spreadsheet that shows, using a pessimistic 4% inflation rate for the next 60 years, and zero interest income, $19,000,000 will last her till she's 106 years old. This isn't even using the million in stocks. So, these calculations lead her to conclude she doesn't need more stocks. However, there are problems with Laura's plan:

1. She's keeping too many eggs in one basket, i.e. in cash. This, just in general principal, seems like a bad thing to do.
2. What if Laura isn't being pessimistic enough regarding the 4% inflation/zero interest scenario? What if there is crazy inflation coupled with crazy negative interest rates? What about wealth taxes?

Laura isn't sure how to approach this. One the one hand she would like to diversify, on the other she is scared of risk assets. It is something of a quandary.

$75K is a 0.357% WR...anything aside from burying it under the pool in the backyard works. $75K for 60 years is $4.5M. Park $5M in TIPS and do whatever with the remaining $15M.

If there is ever a wealth tax she can afford to buy a new citizenship, pay the exit tax (if there is one) and renounce her US citizenship. More likely is that it would be tied up in the courts until she is gone anyway.
You think it'll be okay if Laura DCAs into TIPS?
I think it would be better if she lump sum's into TIPS if that's her investment choice :)
Since nigel keeps jumping in calling me a know-it-all and calling my arguments "old and tired" (Often old arguments are the best ones!) I am done playing with this hypothetical.
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Re: How did you determine risk tolerance?

Post by Robot Monster »

DaftInvestor wrote: Wed Jul 29, 2020 12:21 pm I think it would be better if she lump sum's into TIPS if that's her investment choice :)
Since nigel keeps jumping in calling me a know-it-all and calling my arguments "old and tired" (Often old arguments are the best ones!) I am done playing with this hypothetical.
Well, thank you again!
“There are no answers, only choices.” ― Stanislav Lem, Solaris
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Re: How did you determine risk tolerance?

Post by Third Son »

In an old Calvin and Hobbes strip, Calvin asked his dad how they determined weight restrictions on bridges. His dad said "they just keep driving heavier and heavier trucks over it until it collapses. Then they weigh the last truck and rebuild the bridge." Kinda like that. I was lucky that I got close enough on my first try.
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Re: How did you determine risk tolerance?

Post by FelixTheCat »

You lost 46% of your money this year. How did you react? Was it a "Buying Opportunity" or "The Sky is Falling" mentality. Risk tolerance simply allows you to sleep at night while you stay the course.

Personally, I can't handle big swings in my portfolio. I am 50/50.
Felix is a wonderful, wonderful cat.
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Re: How did you determine risk tolerance?

Post by RadAudit »

I found mine by starting with a fairly aggressive AA. Then every 10 years or so when I lost 50% on the equity side, I lowered my AA by 10% points. I stopped at 50 / 50 when I retired 10 years ago and have remained their ever since. :happy

Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
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