Is your risk tolerance to dollars or percentages?

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Ron Scott
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Is your risk tolerance to dollars or percentages?

Post by Ron Scott » Sun Oct 07, 2018 8:10 am

If you happily retire with $1M at 50-50 and feel comfortable that you can easily weather a 50% drop in the stock market, what do you do if you unexpectedly inherit another million?

Are you immediately fearful of losing a percentage of the new $2M portfolio and invest the $2M again at 50-50, or is the additional million gravy, that can all be invested in equities, since the risk of losing the amount in dollars from the initial million would remain unchanged?
Last edited by Ron Scott on Sun Oct 07, 2018 8:13 am, edited 1 time in total.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

Ron Scott
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Re: Is your risk tolerance to dollars or percentages?

Post by Ron Scott » Sun Oct 07, 2018 8:11 am

Double
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

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watchnerd
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Re: Is your risk tolerance to dollars or percentages?

Post by watchnerd » Sun Oct 07, 2018 8:27 am

Ron Scott wrote:
Sun Oct 07, 2018 8:10 am
If you happily retire with $1M at 50-50 and feel comfortable that you can easily weather a 50% drop in the stock market, what do you do if you unexpectedly inherit another million?

Are you immediately fearful of losing a percentage of the new $2M portfolio and invest the $2M again at 50-50, or is the additional million gravy, that can all be invested in equities, since the risk of losing the amount in dollars from the initial million would remain unchanged?
Not enough info.

On the face of it, $1 million isn't really enough by itself for me to retire comfortably at a conservative 3% SWR -- so do I have another source of income?

How many years of living expenses are represented by the $1 million? How many years of living expenses do I have in bonds?

How old am I?

However, if all my life expenses are covered and I have decades yet to live and you're basically asking what do I do with a $1 million windfall?

Take out 100-150k to enjoy some life upgrades now, put the rest in equities. So dollars.
Last edited by watchnerd on Sun Oct 07, 2018 8:29 am, edited 2 times in total.
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Tycoon
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Re: Is your risk tolerance to dollars or percentages?

Post by Tycoon » Sun Oct 07, 2018 8:27 am

Dollars, I can't buy anything with percentages.
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andrew99999
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Re: Is your risk tolerance to dollars or percentages?

Post by andrew99999 » Sun Oct 07, 2018 8:28 am

I would have thought that you should be re-assessing your asset allocation to what you feel comfortable with based on your new net worth and new risk tolerance, no?

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Re: Is your risk tolerance to dollars or percentages?

Post by watchnerd » Sun Oct 07, 2018 8:30 am

andrew99999 wrote:
Sun Oct 07, 2018 8:28 am
I would have thought that you should be re-assessing your asset allocation to what you feel comfortable with based on your new net worth and new risk tolerance, no?
Yeah, that's what I would do and why I said not enough info.
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Shallowpockets
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Re: Is your risk tolerance to dollars or percentages?

Post by Shallowpockets » Sun Oct 07, 2018 8:32 am

Aside from this particular problem posed, which is speculative and just an exercise in nothing, to me a lot of my returns are thought of in dollar terms instead of percentages.
If I have 1 million and it goes up only that 4%, I glady take that as $40k. This is in regards to my expenses which are usually only $20k a year. Therefore I am ahead of the game.
If I stay with percentage, not so much a happiness factor, as 4% is mediocre at best.

MathMann
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Re: Is your risk tolerance to dollars or percentages?

Post by MathMann » Sun Oct 07, 2018 8:39 am

Dollars.

I use a time-based allocation that employs a bucket approach. I'm retired, age 59.

Funds equal to the next two years of expenses are in cash (MM, CDs), the 8 years after that are in a fixed income stable value fund, and all other funds are a mix of stock index funds (domestic and international) and dividend growth stocks.

On a % basis it's 33% stocks and 67% non-stocks. I sleep fine and as Warren Buffett recommends I make my money while I'm sleeping at night .

Random Walker
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Re: Is your risk tolerance to dollars or percentages?

Post by Random Walker » Sun Oct 07, 2018 10:25 am

If the person is comfortable at 50/50 with the first 1M, then the marginal benefit of the second 1M will be less. Moreover the marginal benefit of growing that second 1M will be much less. Probably not a lot of benefit to putting it at much risk. One could just put it all in bonds as an extra security blanket. Alternatively, one could look at all the assets as a single portfolio and perhaps create a new asset allocation, perhaps 30/70ish.
Assuming stocks can lose 50% in any given year, the 50/50 1M portfolio can lose about 250K and the 30/70 2M portfolio can lose about 300K. In reality, each of those portfolios would lose a bit less because the correlation of bonds to equities turns strong negative in bad times for equities.
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Phineas J. Whoopee
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Re: Is your risk tolerance to dollars or percentages?

Post by Phineas J. Whoopee » Sun Oct 07, 2018 11:00 am

I am sensitive to the dollar value of the portfolio as a whole expressed as a multiple of my projected annual expenses, calculated in real terms.

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

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

In terms of an unexpected windfall I would invest it per my already-conservative allocation, and consider upping my lifestyle and upping my charitable donations. Each dollar is exactly like every other, and neither knows nor cares how it came into my possession, so the source doesn't matter.

I would be reluctant to increase my fixed costs.

PJW

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Phineas J. Whoopee
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Re: Is your risk tolerance to dollars or percentages?

Post by Phineas J. Whoopee » Sun Oct 07, 2018 11:31 am

Random Walker wrote:
Sun Oct 07, 2018 10:25 am
...
Assuming stocks can lose 50% in any given year, the 50/50 1M portfolio can lose about 250K and the 30/70 2M portfolio can lose about 300K. In reality, each of those portfolios would lose a bit less because the correlation of bonds to equities turns strong negative in bad times for equities.
Dave
Sometimes that happens, but it isn't reliable.

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Random Walker
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Re: Is your risk tolerance to dollars or percentages?

Post by Random Walker » Sun Oct 07, 2018 11:43 am

PJW,
I agree, wouldn’t count on it. But does tend to occur.

Dave

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Re: Is your risk tolerance to dollars or percentages?

Post by grabiner » Mon Oct 08, 2018 7:25 pm

Ron Scott wrote:
Sun Oct 07, 2018 8:10 am
If you happily retire with $1M at 50-50 and feel comfortable that you can easily weather a 50% drop in the stock market, what do you do if you unexpectedly inherit another million?

Are you immediately fearful of losing a percentage of the new $2M portfolio and invest the $2M again at 50-50, or is the additional million gravy, that can all be invested in equities, since the risk of losing the amount in dollars from the initial million would remain unchanged?
This depends on what I intend to do with that extra million. If I will use it to improve my own standard of living (moving to a more expensive home, traveling more), then it makes sense to keep a similar allocation. If I expect it will go to my heirs, then I can invest it as appropriate for the heirs.
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Ron Scott
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Re: Is your risk tolerance to dollars or percentages?

Post by Ron Scott » Mon Oct 08, 2018 8:24 pm

grabiner wrote:
Mon Oct 08, 2018 7:25 pm
Ron Scott wrote:
Sun Oct 07, 2018 8:10 am
If you happily retire with $1M at 50-50 and feel comfortable that you can easily weather a 50% drop in the stock market, what do you do if you unexpectedly inherit another million?

Are you immediately fearful of losing a percentage of the new $2M portfolio and invest the $2M again at 50-50, or is the additional million gravy, that can all be invested in equities, since the risk of losing the amount in dollars from the initial million would remain unchanged?
This depends on what I intend to do with that extra million. If I will use it to improve my own standard of living (moving to a more expensive home, traveling more), then it makes sense to keep a similar allocation. If I expect it will go to my heirs, then I can invest it as appropriate for the heirs.
This is an important point and also pertains to people who have a balance of AA, spending and savings that allows them to ignore their equities altogether and never withdraw them.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

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Re: Is your risk tolerance to dollars or percentages?

Post by Dulocracy » Thu Oct 11, 2018 10:56 pm

Neither. I have been through 2 crashes and several downturns, but I have yet to experience concern or unhappiness at the downturn. I simply buy more, even though I am 100% stocks in my Investment Portfolio. Apparently my tolerance to risk is very high. Of course, we use a reverse Bond strategy of paying down the mortgage as the bond allocation. Upon payoff of the mortgage we will pay the full amount of the mortgage into bond funds in addition to our regular investment to recapture that money. As this strategy requires that one give up both liquidity and the ability to rebalance, one could say that my risk tolerance is even higher. That is not necessarily a good thing. Nonetheless, at the point of recapture, we will be saving a percentage of our savings into bonds, but not rebalancing. Our ultimate goal is to have 12 years of expenses in bonds, so if I had a risk tolerance level, I would have to say it would be in dollars.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

heyyou
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Re: Is your risk tolerance to dollars or percentages?

Post by heyyou » Fri Oct 12, 2018 1:23 am

Dollars suit me for the bond allocation. We have a decade or more of retirement spending in bond funds.

Ari
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Re: Is your risk tolerance to dollars or percentages?

Post by Ari » Fri Oct 12, 2018 2:09 am

Ron Scott wrote:
Sun Oct 07, 2018 8:10 am
Are you immediately fearful of losing a percentage of the new $2M portfolio and invest the $2M again at 50-50, or is the additional million gravy, that can all be invested in equities, since the risk of losing the amount in dollars from the initial million would remain unchanged?
My risk tolerance is in dollars, so to me the reasonable thing to do is to sell the 500k in bonds and go 100% stocks. A 50% decline in stocks would bring the 50/50 1M portfolio down to 750k, and the 100/0 2M portfolio down to 1M. So even with a 100% stocks portfolio, I can now feel safer than I could before.

As I like to say, the best downside protection is having a lot of money.
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Re: Is your risk tolerance to dollars or percentages?

Post by randomizer » Fri Oct 12, 2018 2:53 am

If I get a $1m windfall, my risk tolerance goes down because of the whole "why keep playing of you've already seen the game" thing. Both the $ amount and % amount that I want to keep in relatively "safe" assets go up.

On the other hand, if the windfall didn't take me from not-yet-won to have-won (ie. either I stay not-yet-won or I stay have-won) I do nothing; continue as planned (respecting glide path, if applicable).

This, from my perspective as an accumulating non-retiree.
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