Can you train yourself to be less risk averse?

[KlangFool]

C) In a country with an average gross saving rate of less than 5%, why do you think someone would saves more than 10%?

Because they are on Bogleheads?

"Besides the savings I outlined was retirement savings. I said nothing about zero other liquidity."

D) How realistic is this?

KlangFool

How realistic that someone builds an emergency fund? How realistic is it that…checks notes…unemployment insurance exists? That a college graduate can get a part time job offsetting the loss of income?

Very. How realistic that someone will lose their job, never find another, locusts will fall from the sky and cats and dogs will live together?

ScubaHogg,

"How realistic that someone builds an emergency fund? "

If they only saves 10% per year and hope to be lucky for 6 to 12 years.

"unemployment insurance exists? "

In my state, you only get maximum unemployment benefits of 10K.

"That a college graduate can get a part time job offsetting the loss of income?"

Saves 10% of 80K means spending 80K - 24K - 8K = 48K per year of expense. A part-time job is not good enough.

"Very. How realistic that someone will lose their job, never find another,"

It does not take never. As per your example of 10% saving rate, it only take a few months of unemployment to put the person in financial trouble.

"locusts will fall from the sky and cats and dogs will live together?"

Unemployment and recession recurred regularly. It does not take a doomsday.

KlangFool

[KlangFool]

B) In scenario A, if the person only saves 8K, then, the annual expense would be 80K - 24K - 8K = 48K. The person would not survive year 2 unemployment. There is only 8K to spend versus 48K of annual expense. The person only lasted 2 months.

You are struggling with the concept of a lifetime average. Their living expenses didn’t suddenly double In one year

ScubaHogg,

A) That happened regularly when someone overspent on their houses and ended up with a big mortgage.

B) You can be drown in a lake with an average depth of 3 inches.

C) There is a sequence of employment problem here. You either can pay the bill or you don't. No one will wait for you to pay the bill until you find employment.

KlangFool

[ScubaHogg]

Saves 10% of 80K means spending 80K - 24K - 8K = 48K per year of expense. A part-time job is not good enough.

They saved 10% of $40,000 into retirement accounts (this whole discussion is about retirement savings—whether or not you “believe” in them). In the $80,000 year they would have saved tens of thousands more. I don’t know how else to paint this.

Unemployment and recession recurred regularly. It does not take a doomsday.

KlangFool

Yep, and despite that a young persons human capital is pretty safe. After a lifetime of working a year or so of unemployment won’t have made that big of a dent. A college graduate with an engineering degree has probably not had a higher than 5% unemployment rate in decades. And those are transitory.

[ScubaHogg]

B) In scenario A, if the person only saves 8K, then, the annual expense would be 80K - 24K - 8K = 48K. The person would not survive year 2 unemployment. There is only 8K to spend versus 48K of annual expense. The person only lasted 2 months.

You are struggling with the concept of a lifetime average. Their living expenses didn’t suddenly double In one year

ScubaHogg,

A) That happened regularly when someone overspent on their houses and ended up with a big mortgage.

B) You can be drown in a lake with an average depth of 3 inches.

C) There is a sequence of employment problem here. You either can pay the bill or you don't. No one will wait for you to pay the bill until you find employment.

KlangFool

Ok. We’ve lost the plot. I have no idea what you are talking about now.

[KlangFool]

Saves 10% of 80K means spending 80K - 24K - 8K = 48K per year of expense. A part-time job is not good enough.

They saved 10% of $40,000 into retirement accounts (this whole discussion is about retirement savings—whether or not you “believe” in them). In the $80,000 year they would have saved tens of thousands more. I don’t know how else to paint this.

Unemployment and recession recurred regularly. It does not take a doomsday.

KlangFool

Yep, and despite that a young persons human capital is pretty safe. After a lifetime of working a year or so of unemployment won’t have made that big of a dent. A college graduate with an engineering degree has probably not had a higher than 5% unemployment rate in decades. And those are transitory.

ScubaHogg,

"In the $80,000 year they would have saved tens of thousands more. I don’t know how else to paint this. "

You do not have to paint this. You just have to give me a number on the total savings.

"A college graduate with an engineering degree has probably not had a higher than 5% unemployment rate in decades."

A person cannot be 5% unemployed. This is personal finance. Unemployment rate is for the economist.

"After a lifetime of working a year or so of unemployment won’t have made that big of a dent."

Aka, a very lucky person. That is the basis of your assumption.

KlangFool

[KlangFool]

B) In scenario A, if the person only saves 8K, then, the annual expense would be 80K - 24K - 8K = 48K. The person would not survive year 2 unemployment. There is only 8K to spend versus 48K of annual expense. The person only lasted 2 months.

You are struggling with the concept of a lifetime average. Their living expenses didn’t suddenly double In one year

ScubaHogg,

A) That happened regularly when someone overspent on their houses and ended up with a big mortgage.

B) You can be drown in a lake with an average depth of 3 inches.

C) There is a sequence of employment problem here. You either can pay the bill or you don't. No one will wait for you to pay the bill until you find employment.

KlangFool

Ok. We’ve lost the plot. I have no idea what you are talking about now.

Never mind. I understand you perfectly. You are a very lucky person.

KlangFool

[ScubaHogg]

Aka, a very lucky person. That is the basis of your assumption.

KlangFool

Or more like a median/average person with that demographic

Again and for the last time. One can make some reasonable assumptions about future income (which is what all of y’all actually do in life even if you can’t admit it) or one can assume your future income is zero (which leads to weird conclusions, including living a subsistence life until risk less FI is achieved).

That’s it. Those are the choices.

[ScubaHogg]

Never mind. I understand you perfectly. You are a very lucky person.

KlangFool

Well, yeah. I had loving parents and I live in America in the 21st century. So yes, very

[Claudia Whitten]

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 disagree with your opinion. Risk aversion is a survival mechanism. Those who lacked it in the past got killed in short order and failed to pass on their genes. Respect your risk aversion; it exists for a good reason.

This would make sense if the price change itself was some sort of risk. It's not. The risk is that when you go to spend a dollar, you don't have it. That's the risk. You have to think a little bit to find the risk-reducing actions.

This is just volatility aversion, and in a lot of people, it causes them to heap risk upon themselves. I don't know why.

The price change is indeed a risk. The only view in which it's not a risk is a view in which it is absolutely assured that the price will return to an acceptable level, at or before the time that the investor needs it to reach that level. That is never assured.

Correct.

[Claudia Whitten]

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 disagree with your opinion. Risk aversion is a survival mechanism. Those who lacked it in the past got killed in short order and failed to pass on their genes. Respect your risk aversion; it exists for a good reason.

Dr Bernstein has a nice talk with Rick Ferri about how our primitive lizard brains are not well adapted for investing. Good risk management is not based on a fight or flight response. One should not listen to their primal-brain and should instead learn to invest with logic and reasoning. This means not liking what you are doing because you understand what is best. This means both purchasing stocks even when you hate them the most and buying bonds when you hate them the most. Good risk management will feel very uncomfortable at times because you have to conquer emotion with logic and reasoning.

You're not talking about risk management. You're talking about asset allocation, and implicitly you're advocating a heavy weighting in stocks, on the assumption that they will make you richer, not poorer, in the timeframe in which you need to draw the funds, are you not?

If so, good luck with that.

This whole thread sounds like a plea for approval for an asset allocation that's heavily tilted toward risk assets. Why is this necessary? If you're happy with a lot of your dough in stocks, run with it, and let others do what they feel is prudent for their situation.

One nice thing about getting older is that FOMO lessens. When you reach your goals and have enough, there's often a greater concern with asset preservation than asset accumulation. With the promise of making a lot comes the risk of losing a lot, and the latter is unacceptable when you're older and need your capital.

[ThankYouJack]

Never mind. I understand you perfectly. You are a very lucky person.

KlangFool

Well, yeah. I had loving parents and I live in America in the 21st century. So yes, very

Agreed.

It's easy to lose track of how fortunate / wealthy we are if we're always concerned about not having enough and losing it all.

People can change mindset and become less risk averse, but it'll take time and work. Some things most of us could probably work on are:

* Having more of an abundance mindset than scarcity mindset
* Being more optimistic than pessimistic
* Living a life of love over fear

[abc132]

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 disagree with your opinion. Risk aversion is a survival mechanism. Those who lacked it in the past got killed in short order and failed to pass on their genes. Respect your risk aversion; it exists for a good reason.

Dr Bernstein has a nice talk with Rick Ferri about how our primitive lizard brains are not well adapted for investing. Good risk management is not based on a fight or flight response. One should not listen to their primal-brain and should instead learn to invest with logic and reasoning. This means not liking what you are doing because you understand what is best. This means both purchasing stocks even when you hate them the most and buying bonds when you hate them the most. Good risk management will feel very uncomfortable at times because you have to conquer emotion with logic and reasoning.

You're not talking about risk management. You're talking about asset allocation, and implicitly you're advocating a heavy weighting in stocks, on the assumption that they will make you richer, not poorer, in the timeframe in which you need to draw the funds, are you not?

If so, good luck with that.

This whole thread sounds like a plea for approval for an asset allocation that's heavily tilted toward risk assets. Why is this necessary? If you're happy with a lot of your dough in stocks, run with it, and let others do what they feel is prudent for their situation.

One nice thing about getting older is that FOMO lessens. When you reach your goals and have enough, there's often a greater concern with asset preservation than asset accumulation. With the promise of making a lot comes the risk of losing a lot, and the latter is unacceptable when you're older and need your capital.

What I actually said is that AA doesn't alter risk near as much as portfolio size and that at 40x 50/50 is the least risk AA. I said to match stock risk with bond risk which results in different AA's depending on portfolio size and stage in life (early accumulator vs soon to retire vs retiree) with more luxury for AA choice at high multiples of expenses. That leaves room for TIPS ladders and all kinds of Boglehead approved strategies and is nothing like what you suggest.

Your view of my position is so far off that it must based on misstating my beliefs so you can hold on to incorrect views on risk. I suggest actually reading my posts instead of altering my position in order to reject it. You can only read the stock-heavy accumulation part of my posts but what I actually suggest is balancing risks throughout our lifetime.

This whole thread is a plea for people to actually understand risks.

[Fallible]

...
I’ve lost track of where I read the anecdote about the couple who once had 13 million, but the husband wanted more, so at the time of the anecdote they were down to 3 million. (Anybody know where that is? Those four articles about risk?. ...

I believe you are referring to Larry Swedroe's "Ability, Willingness, and Need to Take Risk" series, which is in the wiki's "Asset allocation" and "Risk tolerance" pages. I agree that he makes an important point about "need" and when it's really needed.

[Fallible]

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 disagree with your opinion. Risk aversion is a survival mechanism. Those who lacked it in the past got killed in short order and failed to pass on their genes. Respect your risk aversion; it exists for a good reason.

Dr Bernstein has a nice talk with Rick Ferri about how our primitive lizard brains are not well adapted for investing. Good risk management is not based on a fight or flight response. One should not listen to their primal-brain and should instead learn to invest with logic and reasoning. This means not liking what you are doing because you understand what is best. This means both purchasing stocks even when you hate them the most and buying bonds when you hate them the most. Good risk management will feel very uncomfortable at times because you have to conquer emotion with logic and reasoning.

I agree with the above posts, especially the references to respecting risk aversion and good risk management. But where I've boldfaced, I would say that one should, indeed must, listen to their primal brain, their own unique risk aversion, and invest based on that. For example, I was once so risk averse that I couldn't bring myself to invest in stocks, yet I knew from continuing to learn about investing that it was a good financial move. Then I learned about Jack Bogle and low-cost, long-term indexing, the "fair shake" for the small investor. This was OK with my risk aversion and I started investing in index funds - and still there some 36 years later. And I am just one of many millions who found it possible to practice good risk management by respecting our aversions to risk, by indexing.

[JackoC]

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 disagree with your opinion. Risk aversion is a survival mechanism. Those who lacked it in the past got killed in short order and failed to pass on their genes. Respect your risk aversion; it exists for a good reason.

Dr Bernstein has a nice talk with Rick Ferri about how our primitive lizard brains are not well adapted for investing. Good risk management is not based on a fight or flight response. One should not listen to their primal-brain and should instead learn to invest with logic and reasoning. This means not liking what you are doing because you understand what is best. This means both purchasing stocks even when you hate them the most and buying bonds when you hate them the most. Good risk management will feel very uncomfortable at times because you have to conquer emotion with logic and reasoning.

You're not talking about risk management. You're talking about asset allocation, and implicitly you're advocating a heavy weighting in stocks, on the assumption that they will make you richer, not poorer, in the timeframe in which you need to draw the funds, are you not?

If so, good luck with that.

This whole thread sounds like a plea for approval for an asset allocation that's heavily tilted toward risk assets. Why is this necessary? If you're happy with a lot of your dough in stocks, run with it, and let others do what they feel is prudent for their situation.

One nice thing about getting older is that FOMO lessens. When you reach your goals and have enough, there's often a greater concern with asset preservation than asset accumulation. With the promise of making a lot comes the risk of losing a lot, and the latter is unacceptable when you're older and need your capital.

I again basically agree. But would generalize the point about getting older, that it's partly the same issue two other posters are going back and forth on, human capital. One major reason to take more financial asset risk while younger is that a given % stocks is a smaller % of overall assets including intangible ones like future labor earnings potential. Although another reason might be as you suggest just a different outlook on life. It's sometimes said in general ca. 40's are a period where many people set aside dreams of youth (getting 'rich' just by index investing might be one, especially at the relatively low expected return implied by today's stock valuations) and get used to their life as it's actually turned out.

Anyway it's possible to choose an aggressive or non-aggressive asset allocation either using emotion or reason. I also detect an implication in abc123 posts that 'logic and reasoning' weighs in favor of lots of stock risk and I don't necessarily agree. There is a such thing as emotionally overreacting to normal 'wave action' on the sea of investing, but there are also rogue waves you can't predict by their frequency or height as you sailed through basically favorable seas (the US as it gained and held world leadership). We might be entering fundamentally less favorable seas. Or not, we simply don't know, but the short past data set of 100+ yrs (3 independent trials of a 30+ yr strategy) US only is no guide, and discussions about using larger/longer datasets never go anywhere.

Also rational actor theory says, even if pop personal finance writers often quoted as authorities disagree, that for a given personal risk aversion input to a formal utility function, like Constant Relative Risk Aversion, relative valuations of stocks and bonds would matter to asset allocation (the Merton Fraction). It's 'behavioral finance', based on the *not* logical aspects of individual investor thinking, that says to stick with a given % stocks regardless of market valuation if personal circumstances don't change. So, I'm saying to change allocation based on each day's market moves? I'm not, just to be aware rational actor theory doesn't support constant % ignoring market pricing. That's significant lately as TIPS yields went from -1% ish to +2% and stock index valuation basically didn't change (2021 to recently). To some views an AA discussion should be absolutely identical in 2021 and earlier this year for a given personal situation, but I can't see that from a common sense POV even besides theory.

[Abe]

I think most people are intrinsically risk averse, but in order to achieve our goals, we have to be able to take on some risk. I know I am basically risk averse, and many times I have had to force myself to take more risk. There is always a trade off. Do I want to take more risk to potentially get a higher return? In my experience, the more knowledgeable I am, the more risk I can manage. When I was buying mortgages , I asked myself what is the worst that can happen. If I could buy a mortgage for say 50% of the value of the property securing it, then the property would have to lose half of its value for me to lose money, so I didn't think there was much risk there. Same thing with stocks assuming I'm investing in a total market index fund. I know that historically the stock market has lost as much as 50% of its value except for the great depression when it lost more than that. So, if I can live with a 50% loss, I can deal with it. I'm willing to accept the worst case in order to potentially get a higher return. So I have essentially trained myself to take more risk. In most cases, I was glad I did.

[jginseattle]

If you embrace more risk you must be prepared to respond accordingly when risk does show up.

[abc132]

If you embrace more risk you must be prepared to respond accordingly when risk does show up.

People investing based on risk aversion are not reducing risk. They are investing based on emotions (fear) just like the current NVDA options thread that invests based on greed. People investing based on emotions are the ones taking more risk and need to be prepared when risk shows up.