Can you train yourself to be less risk averse?

[gavinsiu]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity. I have notice several approaches on this forum:

1. Don't look at the portfolio too often. Just keep contributing and look at infrequently. If you do, the portfolio taken at a low sample rate will appear to grow over time.
2. This was not advocated in BH, but I see people recommend the opposite approach, look at constant as a sort of immersion therapy.
3. Start out with a low allocation and slowly edge up. One issue I have with this is that stock market crashes aren't a common occurrence. May be you start out at 30% equity and slowly increase it overtime but may be a crash occurs right at 80% equity. The other suggestion was to use something like 50/50 and invest that way until you have a crash, evaluate and then adjust accordingly. The problem is that it may take a while to get a crash.
4. Invest in. target fund and forget about it in the next 30 years.

Personally, I started investing with sector funds and got hammered, but discovered that I wasn't particularly bothered by volatility. This is strange since I am not much of a risk taker in other areas of my life. I don't vacation in unsafe countries, or engage in unsafe activities.

My mom is more risk averse in investment, but have managed to get by by my constant couching not to panic. After several market downturn she now thinks of most crashes as an uncomfortable but temporary situation. I supposed having an investment couch would be another approach.

[jebmke]

Are you trying to overcome risk aversion because you need to take more risk?

[Thesaints]

Focus on the upside risk.

[gavinsiu]

Are you trying to overcome risk aversion because you need to take more risk?

Personally I am not risk averse investment-wise so I do not need to overcome risk aversion.

However, if I am helping other invest, I might need to help them overcome the volatility aversion because in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

[nedsaid]

I think you can train yourself to be less risk averse to some extent. You had some good ideas in your initial post, I think another good idea is to get better educated regarding market and economic history in order to get a longer term perspective on this. There is however the old saying that in the long run, we are all dead. I am 65 years old now and I might have another 25-30 years of life but that isn't really a very long period of time. Retirement is right around the corner now, when I was 45, it seemed in the distant future. I think we can train ourselves to better handle risk but two big facts remain: we are all mortal and human emotion and passion is very powerful. In other words, there are limits to what we can do to minimize sensitivity to risk. We need to understand that we are subject to powerful passions and emotions and thus bouts of irrationality, though it might be temporary.

[jebmke]

Are you trying to overcome risk aversion because you need to take more risk?

Personally I am not risk averse investment-wise so I do not need to overcome risk aversion.

However, if I am helping other invest, I might need to help them overcome the volatility aversion because in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

Not something I would attempt. Not a lot of upside and significant downside. IMO people don't easily change their nature.

[alpenglow]

Don't look at the portfolio too often. Just keep contributing and look at infrequently.

I found the opposite to be true. By looking daily, I got very used to the normal ups and downs as well as the more extended drawdowns.

[mrspock]

I'm mixing my franchises here, but I take the Emperor Palpatine approach: on the worst days, I look at my portfolio... I *feeeeeel* the anger.... the pain....the agony.... the dark side of the market. I soak it up. Similar to dark side force users, eventually you get used to it and perhaps even look forward to the crashes like a proper Sith, due to the ability to buy up cheap shares (force choke) and TLH (force lightning).




Mwahahahahaha

[BirdFood]

Are you trying to overcome risk aversion because you need to take more risk?

Personally I am not risk averse investment-wise so I do not need to overcome risk aversion.

However, if I am helping other invest, I might need to help them overcome the volatility aversion because in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

Right now, with so many people going 100% stocks, I feel that a way of training people to be more risk averse would have more value.

What scenario did you have in mind?

[Afty]

I also think you can train yourself to be less risk averse. There's a logical component to it, where things like backtesting and data can be convincing, depending on the person. And there's an emotional component to it, where maybe you just need to experience a few crashes/panics and see that things always recover, and if you just stay the course things will work out. I mean, just a few weeks ago there was a panic about what turned out to be a relatively small, single day drop, and we don't even remember it now.

[TheTimeLord]

Back in 2022 some supposedly Risk Adverse folks had loaded up on longer duration bonds and bond funds to capture a some more bps from their fixed income investments. In hindsight it seems they may have more Risk Unaware than Risk Adverse. Before you try to teach people to be less Risk Adverse makes sure you can teach them what the risks are. Just a thought.

[KlangFool]

in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

gavinsiu,

A) What if your opinion is wrong, are you to going to pay their bills?

B) Retirement is a luxury. You have to survive in order to succeed. If they cannot survive in the coming recession, how is retirement relevant to them?

C) If they take excessive risk and run into financial problem, are you going to pay their bills?

"most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. "

D) I disagreed! This is simply not true. You cannot solve an insufficient saving rate problem with a more aggressive portfolio. It simply does not work.

E) Conversely, if someone saves enough, any reasonable asset allocation will work.

F) Show us how an insufficient saving rate problem can be solved by being more aggressive? Show us the calculation.

https://investor.vanguard.com/investor- ... allocation

G) The average annual return rate of 100% bond is 5.1%.
The average annual return rate of 100% stock is 10.2%

The difference is 5.1%.

Show us how average annual return difference of 5.1% can help someone that does not save enough.

KlangFool

[AlohaBill]

I am a risk taker. I take on so much risk and I spit on the possibility of loss. I never worry. My family invests in the highly risky Vanguard Target Retirement Fund/ Fidelity FreedomIndex Fund. We started retirement at 30/70% stk/bnd and it is now 42/58%. When we started investing in stocks our asset allocation was about 25% stk. When we bought our house, we became house rich, cash poor. That was risk taking. After that we went wild at 75% stk.

[BirdFood]

I’d say that the risk aversion to be wary of is the kind that makes you sell at the wrong time. The way to blunt that aversion is to respect your natural risk aversion at all times.

I know what I will have left if the stock market drops eighty percent. It’s a number I can cope with.

If the stock market drops eighty percent AND the US Treasury defaults on all its debts? (And in that situation it’s pretty much a given that Social Security and my pension go away.) Well, the house is paid off and I have a vegetable garden…

[retiredjg]

People have their own natures. Where that comes from is impossible to know. Genes, nurture, experience, education, and whatever else you want to throw in there is probably all part of the equation for where one ends up on the risk taking scale.

Can that change? I think so and I think it goes both ways. A risk taker can learn (usually the hard way) that it is wise to take less risk. A non-risk taker can learn (by exposure) that some risk does not make the sky fall. I doubt that a risk taker will ever become truly conservative or that a non-risk taker will ever be prone to high levels of riskiness.

The important thing, if you are trying to help someone else (or yourself for that matter) is to work with where they are...rather than where you think they ought to be.

[Fallible]

Are you trying to overcome risk aversion because you need to take more risk?

Personally I am not risk averse investment-wise so I do not need to overcome risk aversion.

However, if I am helping other invest, I might need to help them overcome the volatility aversion because in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

It's a challenge to try to overcome one's own risk aversion to market volatility, but try to overcome it with another person when you don't believe you have it yourself could be an even bigger challenge as you'd be unlikely to feel and understand what they are up against. In any case, though, your efforts would probably be limited for reasons nedsaid has nicely posted about upthread.

Some of the most helpful advice I’ve learned about risk and risk aversion (and its attending loss aversion) has come from WSJ columnist Jason Zweig, including a book and “Intelligent Investor” columns, one of which listed below takes up the role of DNA:

His book, Your Money & Your Brain includes a chapter on “Risk” although the entire book is generally on the subject of how the human brain works.

Here are just a few of his columns on risk and risk aversion:

https://jasonzweig.com/so-you-think-youre-a-risk-taker/

https://jasonzweig.com/its-the-little-t ... s-outlook/

https://jasonzweig.com/is-your-investin ... -your-dna/

[bd7]

My mom is more risk averse in investment, but have managed to get by by my constant couching not to panic. After several market downturn she now thinks of most crashes as an uncomfortable but temporary situation. I supposed having an investment couch would be another approach.

Surely you mean "coach" unless you are a therapist...

Perhaps you can train yourself to be less risk averse, but should you? I know people that are doing pretty well that only 'invest' in CDs (and carefully at that) unless an insurance agent/annuity salesman gets hold of them. If you're happy and comfortable with a no-risk portfolio then why should you adjust who you are just so that your gains match someone elses? Perhaps the other way around--matching your portfolio to your personality--is just as good at creating security and happiness in the long run. Getting a job with a pension and putting all your money in a local brick-and-mortar bank is still a viable and popular option.

[Sandtrap]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity. I have notice several approaches on this forum:

1. Don't look at the portfolio too often. Just keep contributing and look at infrequently. If you do, the portfolio taken at a low sample rate will appear to grow over time.
2. This was not advocated in BH, but I see people recommend the opposite approach, look at constant as a sort of immersion therapy.
3. Start out with a low allocation and slowly edge up. One issue I have with this is that stock market crashes aren't a common occurrence. May be you start out at 30% equity and slowly increase it overtime but may be a crash occurs right at 80% equity. The other suggestion was to use something like 50/50 and invest that way until you have a crash, evaluate and then adjust accordingly. The problem is that it may take a while to get a crash.
4. Invest in. target fund and forget about it in the next 30 years.

Personally, I started investing with sector funds and got hammered, but discovered that I wasn't particularly bothered by volatility. This is strange since I am not much of a risk taker in other areas of my life. I don't vacation in unsafe countries, or engage in unsafe activities.

My mom is more risk averse in investment, but have managed to get by by my constant couching not to panic. After several market downturn she now thinks of most crashes as an uncomfortable but temporary situation. I supposed having an investment couch would be another approach.

to op:
One perspective of many.
0
"Risk Averse" in some things can be holistically, "risk averse in many/all things" including financial.
Because we are a complete one person.
1
When we are "risk averse", we are fearful.
2
Fear is the antithesis of making rational decisions, logical strategies, and confident (not false confidence) actions.
3
Fear is powerful and while stunting and supressing thought, emotions take over. One reacts vs responds patiently and methodically.
And, but for creating or imagining artificial constructs like sand castles, we cannot "think" our way out of intractable fear.
4
So, how to overcome fear? How to be a champion?

15 minutes to listen to this if you haven't already. YouTube:38 million views.
US Navy Admiral William H. McRaven, one of the most decorated US commanders, delivers one of the best motivational speeches you will ever hear.
https://www.youtube.com/watch?v=TBuIGBCF9jc
Yes. We can indeed be trained and disciplined to overcome fear. Whether trained on our own, is doubtful, though.

Much like "risk tolerance" in the "wiki", we never truly know unless we are tested, again, and again.....
And, "risk" must be defined: rational and calculated, or emotionally reckless, etc.

j

[windaar]

It sounds like you're saying that a risky AA is a good thing and someone needs to achieve that, kind of how one might achieve a level of fitness through athletic training or attain a certain score on an examination through study. But there is nothing good about a risky AA, just as there is nothing bad about it. It is all about what matches the individual. In any case I fear that anyone "training" himself to be less risk averse, against their true self, might be one of the first to capitulate during the next crash.

[avalpert1]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity.

Do you have any evidence to support your opinion - I know of people who went from ready to retire early to having to work for the foreseeable future by taking on too much risk, I don't really know of any example of someone who would have been able to retire but for a refusal to take on more equity risk of say an 80% rather than 50% equity allocation in broad market indexes...

[CletusCaddy]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity.

Do you have any evidence to support your opinion - I know of people who went from ready to retire early to having to work for the foreseeable future by taking on too much risk, I don't really know of any example of someone who would have been able to retire but for a refusal to take on more equity risk of say an 80% rather than 50% equity allocation in broad market indexes...

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

[CletusCaddy]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity. I have notice several approaches on this forum:

1. Don't look at the portfolio too often. Just keep contributing and look at infrequently. If you do, the portfolio taken at a low sample rate will appear to grow over time.
2. This was not advocated in BH, but I see people recommend the opposite approach, look at constant as a sort of immersion therapy.
3. Start out with a low allocation and slowly edge up. One issue I have with this is that stock market crashes aren't a common occurrence. May be you start out at 30% equity and slowly increase it overtime but may be a crash occurs right at 80% equity. The other suggestion was to use something like 50/50 and invest that way until you have a crash, evaluate and then adjust accordingly. The problem is that it may take a while to get a crash.
4. Invest in. target fund and forget about it in the next 30 years.

Personally, I started investing with sector funds and got hammered, but discovered that I wasn't particularly bothered by volatility. This is strange since I am not much of a risk taker in other areas of my life. I don't vacation in unsafe countries, or engage in unsafe activities.

My mom is more risk averse in investment, but have managed to get by by my constant couching not to panic. After several market downturn she now thinks of most crashes as an uncomfortable but temporary situation. I supposed having an investment couch would be another approach.

Engaging with Stoic philosophy is a great way to make the ups and downs of financial life (and life in general) meaningless.

[Rocinante Rider]

Some types of risk aversion are worth encouraging. I'm averse to manager risk, sector risk, and individual stock risk. Avoiding those risks is among the reasons that I invest in broad market index funds. If I were less averse to those risks, I'd seek out active managers, market-timed sector tilts, and individual stocks. I don't want less risk aversion in these areas. Those are risks that I prefer to 100% avoid.

What I'm left with is unavoidable systematic risks, which investors do need to understand and accept lest they make behavioral mistakes. Having a well thought-out asset allocation that one is financially and psychologically prepared to stick with, whether markets are booming or busting, is something one needs to accept, or to be more "risk tolerant" about if you prefer.

[avalpert1]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity.

Do you have any evidence to support your opinion - I know of people who went from ready to retire early to having to work for the foreseeable future by taking on too much risk, I don't really know of any example of someone who would have been able to retire but for a refusal to take on more equity risk of say an 80% rather than 50% equity allocation in broad market indexes...

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

Eh, I'm not sure the marginal math is all that clear - there will also be 'plenty' of people who couldn't retire because they were in a higher equity allocation at the wrong times too (possibly more because sudden drops tend to have more impact than the benefits of long runups on near-term retirement decisions.

Most retirement decisions aren't marginal choices - if only I had 2% higher return I could retire now. That's not how it works in real life.

[nisiprius]

1) I'm not sure it's possible.

2) I'm not sure it's necessarily a good idea.

3) There's a cheap over-the-counter drug that, according to a paper in Social Cognitive and Affective Neuroscience

...increased risk-taking behavior. ...[It] reduced self-reported perceived risk and this reduction statistically mediated increased risk-taking behavior. These results indicate that [it] can increase risk taking, which may be due to reductions in risk perceptions, particularly those that are highly affect laden.

Pretty sure taking a drug for the purpose of reducing risk aversion would be a really bad idea.

[Nowizard]

I would not train anyone to move away from their decisions and then be accepting criticism if a more risky profile resulted in loss and personal criticism, particularly if you are also advising them on investments. Personally, the focus would be statistical related to their portfolio and typical investing approaches of those with a portfolio of their size at a given age.

[DNeal]

The US bear market of 2007–2009 was a 17 month bear market that lasted from October 9, 2007 to March 9, 2009. During the financial crisis the S&P 500 lost approximately 50% of its value. I thought I could handle any market volatility. I was invested 100% in equities. I was 56 years old and saw my dream of a comfortable retirement disappearing. I stayed the course but had many sleepless nights. Fortunately I could contribute for my retirement to a taxable account but was limited to what I could contribute to my Roth and my tax-deffered account. Can you handle that type of market volatility? Rather than "train yourself to be less risk averse" I would entertain how you would react to a major downturn. I have several friends that capitulated back then and stayed out of the market for years. For me investing is at least 80% behavorial and 20% skill. Most people really don't how they will react until "it" happens.

[CletusCaddy]

I am curious, are there ways to make yourself less risk averse to volatility risk? In my opinion, one of the greatest risk to retirement is people lack of tolerance to volaitity.

Do you have any evidence to support your opinion - I know of people who went from ready to retire early to having to work for the foreseeable future by taking on too much risk, I don't really know of any example of someone who would have been able to retire but for a refusal to take on more equity risk of say an 80% rather than 50% equity allocation in broad market indexes...

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

Eh, I'm not sure the marginal math is all that clear - there will also be 'plenty' of people who couldn't retire because they were in a higher equity allocation at the wrong times too (possibly more because sudden drops tend to have more impact than the benefits of long runups on near-term retirement decisions.

Most retirement decisions aren't marginal choices - if only I had 2% higher return I could retire now. That's not how it works in real life.

I think what you are saying is the people don’t retire based on hitting a number? You might be right about that.

Not true in my case though.

[ScubaHogg]

I’d say two things

1) read more market history. A 5% drop doesn’t seem that serious if you’ve read deeply about the last hundred (or thousand) years of market history

2) properly account for all your assets. This means recognizing your significant human capital if you still have years of working left. Then realize that human capital is very bond like. Eventually you realize that if your human capital overwhelms your financial capital, less equities is riskier than more equities.

It’s a heretical idea on here but is basically true

[alluringreality]

I tend to agree with Cullen Roche about the following. I'm inclined to consider time horizon more personally practical than risk profile. If I'm holding all assets with a reasonable time horizon beyond a decade, it may be fairly inconsistent to then concern myself with immediate value. If immediate value amounts to a personal concern, it may make some sense to hold more near-term assets. This position does not necessarily solve some scarcity or uncertainty objectives for investing, yet I agree with the general premise in relation to some of my own concerns and experiences across years.
https://disciplinefunds.com/2024/08/30/ ... d-returns/
https://disciplinefunds.com/defined-duration-investing/

[windaar]

The US bear market of 2007–2009 was a 17 month bear market that lasted from October 9, 2007 to March 9, 2009. During the financial crisis the S&P 500 lost approximately 50% of its value. I thought I could handle any market volatility. I was invested 100% in equities. I was 56 years old and saw my dream of a comfortable retirement disappearing. I stayed the course but had many sleepless nights. Fortunately I could contribute for my retirement to a taxable account but was limited to what I could contribute to my Roth and my tax-deffered account. Can you handle that type of market volatility? Rather than "train yourself to be less risk averse" I would entertain how you would react to a major downturn. I have several friends that capitulated back then and stayed out of the market for years. For me investing is at least 80% behavorial and 20% skill. Most people really don't how they will react until "it" happens.

Excellent post; should be required reading here. I was a member of an athletic club back then and I remember the old grey-haired guys in the locker room, all they could talk about was the market burning. And every few days one would walk in and announce "I'M OUT!" Watching those guys near or in retirement selling their life savings out low was a real lesson to me in how NOT to do risk tolerance and asset allocation.

[AlwaysLearningMore]

Are you trying to overcome risk aversion because you need to take more risk?

Personally I am not risk averse investment-wise so I do not need to overcome risk aversion.

However, if I am helping other invest, I might need to help them overcome the volatility aversion because in my opinion, most people are increasing the risk of not retiring with sufficient money when they are too risk averse to volaitility. I don't know how to teach how to become less risk averse because I am not risk averse.

Not something I would attempt. Not a lot of upside and significant downside. IMO people don't easily change their nature.

Agree. Why go against instinct when the downside can be substantial?

[unwitting_gulag]

A) What if your opinion is wrong, are you to going to pay their bills?

We have no choice! It's called taxes. If lots of people are careening towards age ~65 with minimal savings/assets, society won't just let them starve. Some kind of remedy will be enacted, with cost to be borne communally. That may mean things like means-testing SS for the "wealthy", increasing taxation rates, raising the eligibility age and so on.

B) Retirement is a luxury. You have to survive in order to succeed. If they cannot survive in the coming recession, how is retirement relevant to them?

What does survival even mean? Not to be crass, but if these folks hang themselves in desperation, then however tragic that is for their families and loved-ones, their non-survival into old age is actually a boon for the national treasury.

C) If they take excessive risk and run into financial problem, are you going to pay their bills?

Same as (a). If their portfolios blow-up, that's comparable, to if their portfolios never existed in the first place.

D) You cannot solve an insufficient saving rate problem with a more aggressive portfolio. It simply does not work.

It all depends on whether the "aggression" was successful or not. Somebody who serendipitously bet the farm on Nvidia a couple of years ago, would have easily made-up for decades of poor savings habits. Somebody who had a large allocation to ex-US stocks, would have been cruelly hampered, despite potentially sedulous and intense savings.

E) Conversely, if someone saves enough, any reasonable asset allocation will work.

My buddy has been a dedicated saver, but never trusted the stock (or bond) market, and put everything into the "stable value fund". His cumulative rate of return has lagged inflation - badly - for some 30 years. He won't be retiring until 70.

F) Show us how an insufficient saving rate problem can be solved by being more aggressive? Show us the calculation.

https://investor.vanguard.com/investor- ... allocation

G) The average annual return rate of 100% bond is 5.1%.
The average annual return rate of 100% stock is 10.2%

The difference is 5.1%.

Show us how average annual return difference of 5.1% can help someone that does not save enough.

I ran these numbers in Excel... assume $20K annual savings, for 35 years. No inflation and no increase in savings (keep it simple. Column 1 is 5% annual return, and column 2 is 10%... over 35 years. I post the spreadsheet, if you like:

@ 5% @ 10%
Year dollars @5 dollars @10
0 0 0
1 20000 20000
2 41000 42000
3 63050 66200
4 86202.5 92820
5 110512.625 122102
10 251557.8507 318748.492
15 431571.2718 635449.6339
20 661319.0821 1145499.99
25 954541.9764 1966941.189
30 1328776.95 3289880.454
35 1806406.147 5420487.37

[KlangFool]

I ran these numbers in Excel... assume $20K annual savings, for 35 years. No inflation and no increase in savings (keep it simple. Column 1 is 5% annual return, and column 2 is 10%... over 35 years. I post the spreadsheet, if you like:

@ 5% @ 10%
Year dollars @5 dollars @10
0 0 0
1 20000 20000
2 41000 42000
3 63050 66200
4 86202.5 92820
5 110512.625 122102
10 251557.8507 318748.492
15 431571.2718 635449.6339
20 661319.0821 1145499.99
25 954541.9764 1966941.189
30 1328776.95 3289880.454
35 1806406.147 5420487.37

unwitting_gulag,

What does 20K means to this person in terms of annual expense?

A) 10% of the annual expense. The annual expense is 200K per year. It takes 35 years of continuous full employment at 10% return to reach 5+millions and retired.

Starting Net Worth 0%
Annual Savings 10%
Years
Annual Return Rate 25 26 27 28 29 30 31 32 33 34 35
5.00% 477% 511% 547% 584% 623% 664% 708% 753% 801% 851% 903%
6.00% 549% 592% 637% 685% 736% 791% 848% 909% 973% 1042% 1114%
7.00% 632% 687% 745% 807% 873% 945% 1021% 1102% 1189% 1283% 1382%
8.00% 731% 800% 874% 953% 1040% 1133% 1233% 1342% 1460% 1586% 1723%
9.00% 847% 933% 1027% 1130% 1241% 1363% 1496% 1640% 1798% 1970% 2157%
10.00% 983% 1092% 1211% 1342% 1486% 1645% 1819% 2011% 2223% 2455% 2710%

B) 50% of the annual expense The annual expense is 40K per year.

With an annual return of 5%, it takes 25+ year to reach 25X
With an annual return of 10%, it takes 18+ year to reach 25X


Starting Net Worth 0%
Annual Savings 50%
Years
Annual Return Rate 18 19 20 21 22 23 24 25 26
5.00% 1407% 1527% 1653% 1786% 1925% 2072% 2225% 2386% 2556%
6.00% 1545% 1688% 1839% 2000% 2170% 2350% 2541% 2743% 2958%
7.00% 1700% 1869% 2050% 2243% 2450% 2672% 2909% 3162% 3434%
8.00% 1873% 2072% 2288% 2521% 2773% 3045% 3338% 3655% 3998%
9.00% 2065% 2301% 2558% 2838% 3144% 3477% 3839% 4235% 4666%
10.00% 2280% 2558% 2864% 3200% 3570% 3977% 4425% 4917% 5459%

C) 100% of the annual expense. The annual expense is 20K per year.

With an annual return of 5%, it takes 16+ year to reach 25X
With an annual return of 10%, it takes 13+ year to reach 25X

Starting Net Worth 0%
Annual Savings 100%
Years
Annual Return Rate 12 13 14 15 16 17
5.00% 1592% 1771% 1960% 2158% 2366% 2584%
6.00% 1687% 1888% 2102% 2328% 2567% 2821%
7.00% 1789% 2014% 2255% 2513% 2789% 3084%
8.00% 1898% 2150% 2421% 2715% 3032% 3375%
9.00% 2014% 2295% 2602% 2936% 3300% 3697%
10.00% 2138% 2452% 2797% 3177% 3595% 4054%

It is the saving rate based on the annual expense that matters. If someone does not save enough as compare to their annual expense, being more aggressive does not help.

KlangFool

[Regal 56]

There are lots of ways to acclimate oneself to risk. Sometimes a movie scene can hit the mark. I’ve always thought this snippet from “It’s a Wonderful Life” neatly encapsulates what happens in a market crash.

https://youtu.be/1VIk4FIshp0?si=plmL4-NIU2Rk7hjF&t=56

That’s it in a nutshell: dumb money sells—smart money buys. When you truly grasp this, you cultivate a strong aversion to being the dumb money.

[Landbroker]

You absolutely can train or reframe your mindset over risk. The subset of risk tolerance is knowledge, fear and emotional intelligence.
First know that you should analyze your fear.
What are you afraid of - most people fear something that actually can not impact them. You can only be harmed mentally, physically, financially or if you are a believer then spiritually.
Loss hurts or is felt twice that of gain - read Kahnaman Thinking Slow and Fast Articles. This is why Las Vegas is successful due to loss aversion being continue to bet gives hope of winning.
We all have clothes in our closet we will never wear again but easier to keep then to discard.
Here are some truths:
1) few other investments beat US stock market over time.
2) a diversified portfolio reduces risk of loss.
3) the largest risk is staying in safe investments due to inflation.
4) if the market drops as it will at some point, it has always come back. It is a function of time and patience.
I say best to understand what is your definition of “risk”
and how you can avoid it and what impacts you.
With reflection you may come to conclusion that with right portfolio mix you have little to no risk over time.
Assume if equities lost 50 percent so you have a portfolio to which you would do nothing but wait? (dividend return is higher on percentage basis when prices fall over taking loss)
When you learn what risk and fear is you can manage it and not let it control you.
Buffett has stated the largest risk is loss of value due to
Inflation yet few think in those terms as you don’t realize the loss made on an implicit decision (stay all in cash).

[hudson]

I tried but it didn't work.
I kept thinking, why take risk if there is no need?
From Larry Swedroe long ago.
viewtopic.php?p=1372822#p1372822

[Vivbet]

I agree with your premise.

One of the best ways to inoculate yourself from volatility is to train yourself to buy dips, even if they are small. This way, during a market downturn your natural reflex will be to buy rather than sell.
Once the market recovers, you can reflect on those tax lots with a low cost basis and give yourself a pat on the back.

This approach works well for people who feel compelled to do something when the market goes down. I am a naturally risk averse person and this is one strategy I use to try make volatility more of a friend than an enemy.

[sambb]

isnt a higher volatility ultimately a lower risk since higher stocks % are likely to reach a larger amount of retirement funds? More money = lower risk of running out of money. Hence stocks are lower risk if your goal is to accumulate a portfolio? I dont see how bonds are lower risk since if you were all bonds then you would have a much higher risk of not having enough money. But bonds are lower volatility. I guess if you look at the end $ amount needed, stocks are lower risk?

[MathWizard]

I don't think you can , at least for adults, unless there is a life changing event.

I don't believe that investing in a broad market index is a risky behavior.
I'm surprised that this view seems pervasive on a website devoted to
low cost investing. Investing in a broad market index represents a
risk due to volatility of pricing, which relates to the timing of purchases
and withdrawals, but there are many other types of risk.

I am risk averse,but was 100% stocks for 30 years.
New wealth comes from creating things, and that happens in companies. What could be better than a large portion of the
adult population working in public companies creating value
for you, without you needing to do a thing other than invest
money.

I view a company's value as emanating from the earnings,
not from what someone will pay you for your portion of the stock.

I think that the S&P is currently overpriced, with earnings supporting only about 55% of the current price, so I base my plan on that 55% .

[BirdFood]

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

I think that's an assertion that calls for references/data/support.

[snowday2022]

I’d say two things

1) read more market history. A 5% drop doesn’t seem that serious if you’ve read deeply about the last hundred (or thousand) years of market history

2) properly account for all your assets. This means recognizing your significant human capital if you still have years of working left. Then realize that human capital is very bond like. Eventually you realize that if your human capital overwhelms your financial capital, less equities is riskier than more equities.

It’s a heretical idea on here but is basically true

Good post. Would be interesting to survey folks on their AA when factoring in human capital (how is this quantified?).

[CletusCaddy]

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

I think that's an assertion that calls for references/data/support.

It's simple math.

VASGX is 80/20 and has delivered 8.2% nominal CAGR since inception
$25k annual contribution after 30 years yields $3.2M

VSCGX is 40/60 and has delivered 6.5% nominal CAGR since inception
Same $25k annual contribution requires 35 years to reach $3.2M, and by that point the $3.2 will be worth less in real terms.

[avalpert1]

2) properly account for all your assets. This means recognizing your significant human capital if you still have years of working left. Then realize that human capital is very bond like. Eventually you realize that if your human capital overwhelms your financial capital, less equities is riskier than more equities.

It’s a heretical idea on here but is basically true

Unless you are using significant leverage (and there are those who do advocate for that), then being 100% equities in your 20s and early 30s isn't really significantly riskier or less risky than being 0% during the period when your human capital overwhelms financial capital. The truth is asset allocation when you are young just doesn't matter much beyond the habits it teaches (which is a good reason not to be 100% equities at the time).

And while human capital may be bond like, it is nothing like a risk-free bond and not much like an investment grade bond either in terms of risk and volatility. So don't get too carried away with it as your 'safe' investment.

[BirdFood]

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

I think that's an assertion that calls for references/data/support.

It's simple math.

VASGX is 80/20 and has delivered 8.2% nominal CAGR since inception
$25k annual contribution after 30 years yields $3.2M

VSCGX is 40/60 and has delivered 6.5% nominal CAGR since inception
Same $25k annual contribution requires 35 years to reach $3.2M

That doesn't support your idea that there are "plenty of people who could have retired...died..." etc.

I'm also curious about the math--did you calculate that assuming a steady 8.2 or 6.5 every year, compounded, or using the actual returns? (Average returns or real returns?) I can't find a 'growth of 10K' chart for either one, so it's hard to compare real returns.

Math aside, a person who chooses to go 50/50 and get the same retirement date by saving more and setting a lower target number is not a person who is wrong and should be persuaded to accept higher risk.

[CletusCaddy]

It’s simple math. I’m sure there have been plenty of people who could have retired a few years earlier but didn’t or even died before retiring because they were only 50% stocks.

Whether they knew it or not is another question.

I think that's an assertion that calls for references/data/support.

It's simple math.

VASGX is 80/20 and has delivered 8.2% nominal CAGR since inception
$25k annual contribution after 30 years yields $3.2M

VSCGX is 40/60 and has delivered 6.5% nominal CAGR since inception
Same $25k annual contribution requires 35 years to reach $3.2M

That doesn't support your idea that there are "plenty of people who could have retired...died..." etc.

I'm also curious about the math--did you calculate that assuming a steady 8.2 or 6.5 every year, compounded, or using the actual returns? (Average returns or real returns?) I can't find a 'growth of 10K' chart for either one, so it's hard to compare real returns.

Math aside, a person who chooses to go 50/50 and get the same retirement date by saving more and setting a lower target number is not a person who is wrong and should be persuaded to accept higher risk.

That's like telling someone they should just go make more money.

[BirdFood]

That's like telling someone they should just go make more money.

Arr? How is suggesting that it's possible to retire with a lower target number ($3.2 million is a high number) telling people to make more money?

[CletusCaddy]

That's like telling someone they should just go make more money.

Arr? How is suggesting that it's possible to retire with a lower target number ($3.2 million is a high number) telling people to make more money?

$3.2M supports $128k retirement for 30 years, hardly a ton of money.

Ultimately there are only a few drivers:

1. Income
2. Expenses & savings
3. Risk tolerance / investment return
4. Age of retirement

Which of these are fixed and which can be tuned? Why is #3 dismissed out of hand as fixed and the others seen as easily changeable?

[BirdFood]

That's like telling someone they should just go make more money.

Arr? How is suggesting that it's possible to retire with a lower target number ($3.2 million is a high number) telling people to make more money?

$3.2M supports $128k retirement for 30 years, hardly a ton of money.

$128K plus Social Security does strike me as a pretty decent sum of money.

I just put 3.2 million, $128K, and 30 years in a trinity simulator. 80/20 has a 96.6% success rate. 50/50 has a higher success rate, 99.2%.

$100K strikes me as a decent sum of money. $100K, 50/50, 30 years, $2.3 million, has a 99.3% success rate.

Yes, yes, that's the decumulation phase, but it's still interesting. Does anyone make an equivalent simulator for the accumulation phase?

Ultimately there are only a few drivers:

1. Income
2. Expenses & savings
3. Risk tolerance / investment return

Risk tolerance and investment return are two separate things. They are usually correlated, yes. But there are no guarantees.

4. Age of retirement

Which of these are fixed and which can be tuned? Why is #3 dismissed out of hand as fixed and the others seen as easily changeable?

I'm not dismissing higher risk assets out of hand. I am dismissing the idea that high risk is inherently a good thing, such that everyone should strive to increase their risk tolerance.

[prioritarian]

As my net worth has increased I have become less risk averse because my risk of not being able to meet my retirement needs keeps on asymptotically approaching zero. I expect that as time goes on I will continue to take on more risk and low-correlation leverage.