how did you determine your risk tolerance?

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antiqueman
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Re: how did you determine your risk tolerance?

Post by antiqueman » Tue Feb 13, 2018 12:56 am

I notice that many responses to this question focus on how long you could live on your savings to help determine your AA.

I have a severe problem with buying equities. I have enough income-- a substantial part in tips- to last 20 years and never touch equities. I could buy more equities but do not ever think the time is right.


I only have 10% in equities. From an intellectual standpoint I KNOW I should have more equities and should have for the last 30years. I am 63. I have always been to conservative. with money and investing. I estimate that had I invested at a 40/60 AA over the past 10 years since the 2008 recession I would have made over a million dollars in equities had I bought and held them to now. In essence I left a million dollars on the table the past 10 years. Who knows what that amount is over my work life. Of course no-one knew the market would do what it has done the past 10 year

My point to the OP is that while I could obviously have taken, and can even now,take more risk, I have not done so. One of the reason is that I am just to conservative and do not want to lose money. M y AA was not based on what my true risk tolerance was over my work life.. I hope the you can find the right AA for yourself soon. And, if anyone has any suggestions for a 63 old , with over 20 years of living expenses, about how to increase their equity 10 or 15 more percent I welcome the suggestions. ( I probably need to increase equity for my child and grandchildren)

bling
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Re: how did you determine your risk tolerance?

Post by bling » Tue Feb 13, 2018 6:44 pm

antiqueman wrote:
Tue Feb 13, 2018 12:56 am
I notice that many responses to this question focus on how long you could live on your savings to help determine your AA.
i purposely described my portfolio as a multiplier of my expenses for a couple reasons:

1) even though we're on an online forum with aliases, i don't feel comfortable giving my actual numbers.
2) portfolio as a multiplier of expenses can be used by people of all income levels.
3) the actual question i had was in the thread title: how did you figure out your risk tolerance!!

in the end, this backfired as we spent 2 pages debating on whether i should have an emergency fund or not. a $500 unexpected expense for someone making $30k is very different from a person making $100k. at a lower income you might not have enough left over in your pay check to cover that $500, hence the potential need for an emergency fund. for someone with a high income, it makes no difference. add it to the credit card and pay it off the next statement. you save $500 less that month -- you're still cash positive.
antiqueman wrote:
Tue Feb 13, 2018 12:56 am
I only have 10% in equities. From an intellectual standpoint I KNOW I should have more equities and should have for the last 30years. I am 63. I have always been to conservative. with money and investing. I estimate that had I invested at a 40/60 AA over the past 10 years since the 2008 recession I would have made over a million dollars in equities had I bought and held them to now. In essence I left a million dollars on the table the past 10 years. Who knows what that amount is over my work life. Of course no-one knew the market would do what it has done the past 10 year

My point to the OP is that while I could obviously have taken, and can even now,take more risk, I have not done so. One of the reason is that I am just to conservative and do not want to lose money. M y AA was not based on what my true risk tolerance was over my work life.. I hope the you can find the right AA for yourself soon. And, if anyone has any suggestions for a 63 old , with over 20 years of living expenses, about how to increase their equity 10 or 15 more percent I welcome the suggestions. ( I probably need to increase equity for my child and grandchildren)
does your 20 years include social security or not? if it doesn't i'd say you've already won the game and don't need to take any more risk.

as for increasing your equity allocation, i would say just do it cold turkey and rebalance into 15% or 20% equities. or you can do it slowly by moving 0.5% into equities every month and ease yourself into it, and perhaps even defining a 10-20% equity rebalancing band as part of your IPS.

you can play around with portfoliovisualizer.com with various stock/bond allocations to get a sense of what's happened in the past. the difference between a 10% and 20% allocation is actually very small.

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nisiprius
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Re: how did you determine your risk tolerance?

Post by nisiprius » Tue Feb 13, 2018 6:56 pm

bling wrote:
Sun Feb 11, 2018 3:44 pm
...holding cash is losing money...
No, it isn't. Not unless by "cash" you actually mean literal, physical currency in storage--and by "money" you mean, not money (dollars) but inflation-adjusted purchasing power.

1) Short-term treasury bills generally have kept up with inflation and eked out a tiny real return.

2) Competitive bank accounts generally have done the same thing. Yes, you can, if you wish, put your money in a zero-interest business checking account, but competitive "money market deposit accounts" and even shorter-term CDs have also kept up with inflation.

3) Nobody refers to a loss of real value (purchasing power) as "losing money" except when they are attacking cash or TIPS. For example, $10,000 invested in the Vanguard Total International Stock Market Index Fund grew from $10,000 to $11,980.98 during the ten years 2008 through 2017. Ask people "did the fund lose money?" and I bet ten out of ten will say "no," even though some will add "it did lose real value, however."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

kaudrey
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Re: how did you determine your risk tolerance?

Post by kaudrey » Wed Feb 14, 2018 3:38 pm

bling - to get back to your original question: risk tolerance is easy to intellectually understand; but, as you've noted, hard to know the "feeling" once implemented.

Part of it is your ability to ignore noise and not panic with a 10%, 20%, 30% correction, which will be dependent on a lot of things - your inherent nature, job security, age, other future income sources. I am 75/25 right now, and I am 48. However, I am a fed, will have a federal pension (even if the proposed budget cuts it somewhat), am not in danger of losing my job, and have a partner who also has a good job and pension from a former employer to rely on in a few years. In 2007/8, I was 90/10. I've reduced that slowly over the last 10 years because 1) I'm older and 2) now plan to retire earlier than I thought; so I've adjusted accordingly.

70/30 is a very acceptable allocation - sounds like you won't panic and you have a lot of years to make it up; plus you seem to have a high income and can deal with a lot with just cash flows if needed. Stay the course, keep investing, and you'll be fine. You'll win the game; don't sweat a % here and there.

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