Improving your risk tolerance

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Improving your risk tolerance

Post by martincmartin »

Financial risk is typically defined as volatility of returns. It comes in when some asset class goes down a lot. Many investors freak out and either panic sell what went down, or change financial advisors altogether. This definition of risk is really the chance of a FA losing a client.

A more practical definition of risk is the chance of running out of money in retirement. From this point of view, stocks can be *less* risky than bonds, because over the long run, stocks almost certainly grow more than bonds.

Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education.

For example, here are all the places where a max drawdown of a 60/40 portfolio is more than 20% (using Shiller’s data, so since 1871, and inflation adjusted):

Code: Select all

Sep 1906 -> Oct 1907 (-25.03%, stocks: -35.87%, bonds: -6.21%)
Dec 1915 -> Jun 1920 (-43.67%, stocks: -44.16%, bonds: -44.12%)
Sep 1929 -> Jun 1932 (-50.35%, stocks: -76.80%, bonds: 38.23%)
Feb 1937 -> Apr 1938 (-26.03%, stocks: -41.84%, bonds: 3.79%)
Oct 1939 -> May 1942 (-27.29%, stocks: -37.27%, bonds: -10.84%)
Apr 1946 -> Feb 1948 (-29.24%, stocks: -35.38%, bonds: -19.94%)
Nov 1968 -> Jun 1970 (-24.07%, stocks: -30.98%, bonds: -13.00%)
Jan 1973 -> Dec 1974 (-36.99%, stocks: -50.06%, bonds: -12.18%)
Dec 1976 -> Sep 1981 (-23.35%, stocks: -10.77%, bonds: -40.66%)
Aug 2000 -> Feb 2003 (-22.66%, stocks: -44.85%, bonds: 23.90%)
Oct 2007 -> Mar 2009 (-28.30%, stocks: -49.94%, bonds: 18.80%)
Dec 2021 -> Oct 2022 (-23.88%, stocks: -24.47%, bonds: -23.30%)
Since 1900, it happens about once a decade. In a 30 year retirement, you should expect it to happen three times. Drawdowns of > 29% happen about once every 30 years, so if one happened during your 30 year retirement, you should not be surprised. You should also realize that a 3.8% withdrawal rate did not run out of money during any of these periods, including if you retired Jan 1, 1929 and hit the 50% drawdown.

So, last year's drawdown was historically common and expected. If you're following some back tested withdrawal strategy, such as a 3.8% withdrawal rate, this drawdown was well within historical precedent, so isn't a reason to worry about running out of money in retirement.
User avatar
David Jay
Posts: 14569
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Improving your risk tolerance

Post by David Jay »

There are two factors to risk tolerance. One is factual and math based. As you have said, projecting that you will not run out of money can be reassuring but it is only half the issue.

The other factor is behavioral. Very few people are wired to “go Spock” and be completely analytical in the face of a significant market downturn. This “wiring” seems to be pretty hard-coded in our personalities. That is why it is necessary to understand one’s risk tolerance and select an AA that is appropriate for one’s ability to handle loss.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
adave
Posts: 549
Joined: Thu Sep 13, 2007 7:17 pm
Location: Houston

Re: Improving your risk tolerance

Post by adave »

I think Buffet said keep as much as you need to sleep well at night in cash and the rest all in stocks.

With 5% available in some MMFs these days, cash drag is quite low and this advice seems excellent.
exodusing
Posts: 2196
Joined: Thu Oct 13, 2022 7:32 am

Re: Improving your risk tolerance

Post by exodusing »

martincmartin wrote: Sat Jun 03, 2023 5:59 pmSo, last year's drawdown was historically common and expected. If you're following some back tested withdrawal strategy, such as a 3.8% withdrawal rate, this drawdown was well within historical precedent, so isn't a reason to worry about running out of money in retirement.
The assumption that the past is a reliable guide to the future may not be a safe assumption. In particular, for a 30 year retirement, we have only about three or four independent 30 year data points (fewer if conditions are different now than a hundred years ago). That's not a very solid basis.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

exodusing wrote: Thu Jun 08, 2023 9:29 am The assumption that the past is a reliable guide to the future may not be a safe assumption. In particular, for a 30 year retirement, we have only about three or four independent 30 year data points (fewer if conditions are different now than a hundred years ago). That's not a very solid basis.
Quite true. The future may be worst than the worst period of the past.

My point in this thread is to be familiar with the worst period in the past, and know when we have or haven't surpassed it. And when we haven't surpassed it, then sleep well, knowing that your retirement plan has been tested against it and didn't run out of money.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

David Jay wrote: Thu Jun 08, 2023 9:07 am There are two factors to risk tolerance. One is factual and math based. As you have said, projecting that you will not run out of money can be reassuring but it is only half the issue.

The other factor is behavioral. Very few people are wired to “go Spock” and be completely analytical in the face of a significant market downturn. This “wiring” seems to be pretty hard-coded in our personalities. That is why it is necessary to understand one’s risk tolerance and select an AA that is appropriate for one’s ability to handle loss.
It's certainly true that facts and reason can't always get the upper hand on emotions. However, in personal finance, people seem to take that as a reason to not even try. I think something in between is possible, where education and knowledge can help counteract the emotions. In other words, the whole solution is often described as "understand one’s risk tolerance and select an AA that is appropriate for one’s ability to handle loss," as you say. I'm continually surprised that there seems to be a missing step of trying to change one's risk tolerance.

I would also push back that it's "very few" people who can do this. It seems like basic engineering, knowing the specs and tolerances of your system, and checking whether you're inside those. If your sleeping bag will keep you warm down to 20 degrees F, and it only gets down to 25 degrees F, you'll be warm enough.

There are certainly those who, for whatever reason, don't trust the reasoning, and are forever anxious. But I would think those are the very few, not those who see "microwavable" on the packaging, and can confidently put it in a microwave without worry.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

adave wrote: Thu Jun 08, 2023 9:14 am I think Buffet said keep as much as you need to sleep well at night in cash and the rest all in stocks.
And this is what I'm pushing back against, a little. There's a missing step here of learning how to sleep better at night during a downturn. Of learning what downturns have been like in the past, and knowing that your retirement plan has been testing against those historical returns and found to succeed.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Improving your risk tolerance

Post by Marseille07 »

martincmartin wrote: Thu Jun 08, 2023 11:19 am And this is what I'm pushing back against, a little. There's a missing step here of learning how to sleep better at night during a downturn. Of learning what downturns have been like in the past, and knowing that your retirement plan has been testing against those historical returns and found to succeed.
What the above poster is saying is that you don't need to look at equities during a downturn when you have some cash on hand.

I agree with them. We sleep well when we have enough cash and cash equivalents. Not stocks, not bonds, simply C&CE.
km91
Posts: 1373
Joined: Wed Oct 13, 2021 12:32 pm

Re: Improving your risk tolerance

Post by km91 »

Marseille07 wrote: Thu Jun 08, 2023 11:27 am
martincmartin wrote: Thu Jun 08, 2023 11:19 am And this is what I'm pushing back against, a little. There's a missing step here of learning how to sleep better at night during a downturn. Of learning what downturns have been like in the past, and knowing that your retirement plan has been testing against those historical returns and found to succeed.
What the above poster is saying is that you don't need to look at equities during a downturn when you have some cash on hand.

I agree with them. We sleep well when we have enough cash and cash equivalents. Not stocks, not bonds, simply C&CE.
Yep, number one thing you can do to improve risk tolerance is to stop looking at the value of your investment accounts so much, particularly in an economic/market downturn. Have cash on hand so you don't have to worry about drawing on your investments to meet expenses. Personally, I hide all performance, PnL, and market value metrics in my brokerage app. My IBKR screen shows the ticker and number of shares owned and little else. If I could hide the daily PnL and net account value in the app I would as well
User avatar
calmaniac
Posts: 1315
Joined: Fri Jan 30, 2015 2:32 pm

Re: Improving your risk tolerance

Post by calmaniac »

martincmartin wrote: Thu Jun 08, 2023 11:04 am I would also push back that it's "very few" people who can do this. It seems like basic engineering, knowing the specs and tolerances of your system, and checking whether you're inside those. If your sleeping bag will keep you warm down to 20 degrees F, and it only gets down to 25 degrees F, you'll be warm enough.

There are certainly those who, for whatever reason, don't trust the reasoning, and are forever anxious. But I would think those are the very few, not those who see "microwavable" on the packaging, and can confidently put it in a microwave without worry.
I very much believe in education and your overall premise of trying to help people better understand their finances.

That said, you are not describing the same human race that I interact with on a daily basis. The vast majority of people are not data driven, but responding to their "System 1" reptilian brain. Further, many people don't want to know anything about finances. It makes them uncomfortable, brings up issues, and requires math.

You may live in a world of engineers, but most people are not engineers.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

calmaniac wrote: Thu Jun 08, 2023 11:50 am I very much believe in education and your overall premise of trying to help people better understand their finances.

... [M]any people don't want to know anything about finances. It makes them uncomfortable, brings up issues, and requires math.
This is certainly a good point. Maybe I should revise what I'm saying to be specifically for people who do want to learn enough about investing to fire their AUM advisor and invest in a 3 fund portfolio. These are people who learn enough to know the basic difference between a bond and a stock, who do their own taxes with TurboTax, etc. As you say, we Bogleheads are in the minority.
ckangas
Posts: 122
Joined: Fri May 21, 2021 8:08 pm

Re: Improving your risk tolerance

Post by ckangas »

km91 wrote: Thu Jun 08, 2023 11:43 am Yep, number one thing you can do to improve risk tolerance is to stop looking at the value of your investment accounts so much, particularly in an economic/market downturn.
Is this the case? Rick Ferri noted that he looks at his portfolio returns many times a day since it's displayed on screens he uses for work. But suggested that it was irrelevant because he wouldn't be taking actions based on that result.

I think the opposite case could be made; looking at your returns makes you behaviorally separate that activity from buying/selling. Essentially building up the habit of checking performance, but not taking actions.

I'm not trying to argue one way or another. And perhaps it all comes down to the individual. But it seems complex enough to where I'd like to see a study or further research before trusting the conventional wisdom on the topic too much.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Improving your risk tolerance

Post by nisiprius »

The behavioral economists have shown that you can't avoid behavioral errors just by deciding not to make them.

In one experiment, "anchoring" was explained to subjects, and they were told to avoid anchoring. Then a wheel of fortune was spun, and finally they were asked to guess the number of African countries in the United Nations. Even though they had educated about anchoring, their guess was still influenced by the number that had come up on the wheel of fortune. They couldn't ignore it.

I am skeptical that rational analysis changes our risk tolerance much.
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.
km91
Posts: 1373
Joined: Wed Oct 13, 2021 12:32 pm

Re: Improving your risk tolerance

Post by km91 »

ckangas wrote: Thu Jun 08, 2023 12:10 pm
km91 wrote: Thu Jun 08, 2023 11:43 am Yep, number one thing you can do to improve risk tolerance is to stop looking at the value of your investment accounts so much, particularly in an economic/market downturn.
Is this the case? Rick Ferri noted that he looks at his portfolio returns many times a day since it's displayed on screens he uses for work. But suggested that it was irrelevant because he wouldn't be taking actions based on that result.

I think the opposite case could be made; looking at your returns makes you behaviorally separate that activity from buying/selling. Essentially building up the habit of checking performance, but not taking actions.

I'm not trying to argue one way or another. And perhaps it all comes down to the individual. But it seems complex enough to where I'd like to see a study or further research before trusting the conventional wisdom on the topic too much.
It's my opinion, I don't know if any research exists that bears this out. Certainly looking at your portfolio 0 times per day gives you 0 opportunities to make changes based on emotion or recent market performance, the conventional wisdom seems pretty solid. Looking at your portfolio daily and not taking any action works fine, until it doesn't. Most accounts from professional traders or hedge fund managers suggest that looking at your account or PnL daily does not desensitize you to market moves and is in fact incredibly stressful and emotionally and physically draining, which doesn't seem to be the ideal mindset to be in when making decisions involving your life savings
rockstar
Posts: 6308
Joined: Mon Feb 03, 2020 5:51 pm

Re: Improving your risk tolerance

Post by rockstar »

There is no guarantee that over any given time period that stocks will outperform bonds. There is also no guarantee that either will increase by more than inflation after taxes. This is why people tend to work longer than they want.
adave
Posts: 549
Joined: Thu Sep 13, 2007 7:17 pm
Location: Houston

Re: Improving your risk tolerance

Post by adave »

What I have done, is make the mental fence higher for making any changes to the portfolio.

This has taken many years, but I have learned that often my first instincts are not correct, so better to think about portfolio changes in the time frame of weeks and months, definitely not days or hours.

I look my account often, but attempt very hard to never change a thing.

I find it easier to do with ETFs over individual stocks.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Improving your risk tolerance

Post by Marseille07 »

martincmartin wrote: Sat Jun 03, 2023 5:59 pm Financial risk is typically defined as volatility of returns. It comes in when some asset class goes down a lot. Many investors freak out and either panic sell what went down, or change financial advisors altogether. This definition of risk is really the chance of a FA losing a client.

A more practical definition of risk is the chance of running out of money in retirement. From this point of view, stocks can be *less* risky than bonds, because over the long run, stocks almost certainly grow more than bonds.

Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education.

For example, here are all the places where a max drawdown of a 60/40 portfolio is more than 20% (using Shiller’s data, so since 1871, and inflation adjusted):

Code: Select all

Sep 1906 -> Oct 1907 (-25.03%, stocks: -35.87%, bonds: -6.21%)
Dec 1915 -> Jun 1920 (-43.67%, stocks: -44.16%, bonds: -44.12%)
Sep 1929 -> Jun 1932 (-50.35%, stocks: -76.80%, bonds: 38.23%)
Feb 1937 -> Apr 1938 (-26.03%, stocks: -41.84%, bonds: 3.79%)
Oct 1939 -> May 1942 (-27.29%, stocks: -37.27%, bonds: -10.84%)
Apr 1946 -> Feb 1948 (-29.24%, stocks: -35.38%, bonds: -19.94%)
Nov 1968 -> Jun 1970 (-24.07%, stocks: -30.98%, bonds: -13.00%)
Jan 1973 -> Dec 1974 (-36.99%, stocks: -50.06%, bonds: -12.18%)
Dec 1976 -> Sep 1981 (-23.35%, stocks: -10.77%, bonds: -40.66%)
Aug 2000 -> Feb 2003 (-22.66%, stocks: -44.85%, bonds: 23.90%)
Oct 2007 -> Mar 2009 (-28.30%, stocks: -49.94%, bonds: 18.80%)
Dec 2021 -> Oct 2022 (-23.88%, stocks: -24.47%, bonds: -23.30%)
Since 1900, it happens about once a decade. In a 30 year retirement, you should expect it to happen three times. Drawdowns of > 29% happen about once every 30 years, so if one happened during your 30 year retirement, you should not be surprised. You should also realize that a 3.8% withdrawal rate did not run out of money during any of these periods, including if you retired Jan 1, 1929 and hit the 50% drawdown.

So, last year's drawdown was historically common and expected. If you're following some back tested withdrawal strategy, such as a 3.8% withdrawal rate, this drawdown was well within historical precedent, so isn't a reason to worry about running out of money in retirement.
The problem with this type of analysis is that the historical data isn't so reassuring at the end of the day. Maybe we're entering a new regime where a downturn happens every 5 years instead of a decade, for example.

Also unclear what the 60/40 data has to do with improving your risk tolerance, which sounds like one aims to hold 70/30, 80/20 or 90/10 instead of 60/40.
User avatar
David Jay
Posts: 14569
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Improving your risk tolerance

Post by David Jay »

martincmartin wrote: Thu Jun 08, 2023 11:04 am
David Jay wrote: Thu Jun 08, 2023 9:07 am There are two factors to risk tolerance. One is factual and math based. As you have said, projecting that you will not run out of money can be reassuring but it is only half the issue.

The other factor is behavioral. Very few people are wired to “go Spock” and be completely analytical in the face of a significant market downturn. This “wiring” seems to be pretty hard-coded in our personalities. That is why it is necessary to understand one’s risk tolerance and select an AA that is appropriate for one’s ability to handle loss.
It's certainly true that facts and reason can't always get the upper hand on emotions. However, in personal finance, people seem to take that as a reason to not even try. I think something in between is possible, where education and knowledge can help counteract the emotions. In other words, the whole solution is often described as "understand one’s risk tolerance and select an AA that is appropriate for one’s ability to handle loss," as you say. I'm continually surprised that there seems to be a missing step of trying to change one's risk tolerance.

I would also push back that it's "very few" people who can do this. It seems like basic engineering, knowing the specs and tolerances of your system, and checking whether you're inside those. If your sleeping bag will keep you warm down to 20 degrees F, and it only gets down to 25 degrees F, you'll be warm enough.

There are certainly those who, for whatever reason, don't trust the reasoning, and are forever anxious. But I would think those are the very few, not those who see "microwavable" on the packaging, and can confidently put it in a microwave without worry.
I am one of the very few that can go "Spock". I was 100% stocks through the 2001 and 2007 downturns and up until about age 58 when I started preparing for retirement.

That being said, we are a tiny minority. Every time there is a downturn I see hordes of informed Bogleheads heading for the exits.

Every. Time.

We are hard wired. To put it in the terms of a hardware engineer: "You can't change the wiring diagram with a software update."
Last edited by David Jay on Thu Jun 08, 2023 1:29 pm, edited 1 time in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

Marseille07 wrote: Thu Jun 08, 2023 1:03 pm Maybe we're entering a new regime where a downturn happens every 5 years instead of a decade, for example.
Then look at how many downturns we've had in the last X years, and how that compares historically. In general, seeing whether current returns are better or worse than the worst case data you evaluated against pre-retirement seems doable.

BTW it doesn't need to be historical. It could be Monte Carlo. If your retirement plan succeeded in 98% of cases, look at that 98th percentile where it just barely succeeded, and compare to current returns.
Also unclear what the 60/40 data has to do with improving your risk tolerance, which sounds like one aims to hold 70/30, 80/20 or 90/10 instead of 60/40.
"Improving risk tolerance" here means not getting anxious during a downturn like we had last year. I used 60/40 here as a standard AA during retirement. If someone has some other AA, or a glide path, they should of course see how that does historically or in Monte Carlo simulations, then compare the worst case where it succeeded to current conditions, to decide whether or not to be worried.

Risk tolerance doesn't mean switching your AA to more stocks. Sorry I didn't make that clear in the initial post.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Improving your risk tolerance

Post by Marseille07 »

martincmartin wrote: Thu Jun 08, 2023 1:29 pm "Improving risk tolerance" here means not getting anxious during a downturn like we had last year. I used 60/40 here as a standard AA during retirement. If someone has some other AA, or a glide path, they should of course see how that does historically or in Monte Carlo simulations, then compare the worst case where it succeeded to current conditions, to decide whether or not to be worried.

Risk tolerance doesn't mean switching your AA to more stocks. Sorry I didn't make that clear in the initial post.
OK, if that's the intent then my advice would be:

a) Look at the accounts less often; certainly not daily. You don't really need to check daily when you're making 0 changes.
b) Try to replace bonds with cash & cash equivalents. For example, 60/40 becoming 60/35/5 would go a long way since you know you have an asset class you can count on at all times.

I personally find these measures more reassuring than looking at the frequency of downturns or Monte Carlo.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

Marseille07 wrote: Thu Jun 08, 2023 1:38 pm Try to replace bonds with cash & cash equivalents. For example, 60/40 becoming 60/35/5 would go a long way since you know you have an asset class you can count on at all times.
This sounds like the opposite of what I've done that has made me happy as a clam, and that I'm trying to encourage others to do.

I retired near the start of 2022, which turned out to be the market peak. Both stocks and bonds "crashed" (according to some), and were on track for worst year since the Civil War, or 50/50 second worst in history. So why did I take comfort in the numbers?

Because before I retired, I ran backtests to understand under which conditions my money would last in retirement, and where I would run out. I then compared the actual performance last year against these historical cases, and found it was well within the historical pattern I tested against. So everything was fine, variation was within tolerance, and I slept well.

Moving money to cash would have made me nervous, as I was now in an untested regime, and wasn't sure under which conditions it would succeed or fail. I'd feel like I was traveling on a hope and a prayer, praying that in 39 years there'd still be money in my accounts.

In other words, my peace of mind comes from understanding the scenarios where my investments succeed or fail, then seeing whether we're still in the scenarios where it succeeds.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Improving your risk tolerance

Post by Marseille07 »

martincmartin wrote: Thu Jun 08, 2023 2:06 pm This sounds like the opposite of what I've done that has made me happy as a clam, and that I'm trying to encourage others to do.

I retired near the start of 2022, which turned out to be the market peak. Both stocks and bonds "crashed" (according to some), and were on track for worst year since the Civil War, or 50/50 second worst in history. So why did I take comfort in the numbers?

Because before I retired, I ran backtests to understand under which conditions my money would last in retirement, and where I would run out. I then compared the actual performance last year against these historical cases, and found it was well within the historical pattern I tested against. So everything was fine, variation was within tolerance, and I slept well.

Moving money to cash would have made me nervous, as I was now in an untested regime, and wasn't sure under which conditions it would succeed or fail. I'd feel like I was traveling on a hope and a prayer, praying that in 39 years there'd still be money in my accounts.

In other words, my peace of mind comes from understanding the scenarios where my investments succeed or fail, then seeing whether we're still in the scenarios where it succeeds.
Moving from 60/40 to 60/35/5 doesn't make or break your retirement.

Also, if you are looking at patterns like "a downturn every decade is expected," you need to hold your horses longer than 5 months after the end of a terrible year in my opinion. I'm not trying to sound doom and gloom, just saying it's probably too early to think we're out of the woods.
User avatar
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Improving your risk tolerance

Post by Taylor Larimore »

Bogleheads:

There have been 27 bear market in stocks since 1929 (I was born in 1924).

After surviving my first bear market, I realized "this too shall pass."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:: "A good solid market decline is a blessing. You'll be buying - if you invest each month - stocks at lower and lower prices. Don't be antagonized by that; use that as an opportunity of a lifetime."
"Simplicity is the master key to financial success." -- Jack Bogle
Johnny Sharp
Posts: 31
Joined: Wed May 20, 2015 8:02 am

Re: Improving your risk tolerance

Post by Johnny Sharp »

martincmartin wrote: Thu Jun 08, 2023 2:06 pm
Marseille07 wrote: Thu Jun 08, 2023 1:38 pm Try to replace bonds with cash & cash equivalents. For example, 60/40 becoming 60/35/5 would go a long way since you know you have an asset class you can count on at all times.
This sounds like the opposite of what I've done that has made me happy as a clam, and that I'm trying to encourage others to do.

I retired near the start of 2022, which turned out to be the market peak. Both stocks and bonds "crashed" (according to some), and were on track for worst year since the Civil War, or 50/50 second worst in history. So why did I take comfort in the numbers?

Because before I retired, I ran backtests to understand under which conditions my money would last in retirement, and where I would run out. I then compared the actual performance last year against these historical cases, and found it was well within the historical pattern I tested against. So everything was fine, variation was within tolerance, and I slept well.

Moving money to cash would have made me nervous, as I was now in an untested regime, and wasn't sure under which conditions it would succeed or fail. I'd feel like I was traveling on a hope and a prayer, praying that in 39 years there'd still be money in my accounts.

In other words, my peace of mind comes from understanding the scenarios where my investments succeed or fail, then seeing whether we're still in the scenarios where it succeeds.
Ha! I retired at the same time and I had the same reaction. There's comfort in understanding things. Whether or not that's hard wired I don't know. Terrific post.
Fallible
Posts: 8795
Joined: Fri Nov 27, 2009 3:44 pm

Re: Improving your risk tolerance

Post by Fallible »

martincmartin wrote: Sat Jun 03, 2023 5:59 pm ...
Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education. ...
Education may increase risk tolerance, which can change often throughout a lifetime, but it's really more complicated than that because human beings are so complicated.

From what I've learned and experienced over many years of investing (passive, of course :happy) tolerance for risk can be increased by learning more about risk and experiencing it during a bear market - then again, knowing more about investing risk may lead to taking less of it or even none at all. What we learn depends on our unique needs and abilities and how well we understand them, how well we know ourselves and then stay true to ourselves.

But it gets more complicated, i.e., brain structure, as author and WSJ columnist Jason Zweig wrote in 2014 about new research and then experienced it personally (boldface mine):
Because people have a remarkable ability to distort their own memories, investors who panicked in 2008 and 2009 may be kidding themselves about their ability to survive another crisis. And the typical “risk-tolerance quiz” used by financial advisers is almost useless in predicting how you will react to losses, because perceptions of risk vary so widely.

Increasingly, scientists are tackling the problem. A new study, just published in the prestigious Journal of Neuroscience by a team of researchers at University College London, the University of Sydney, the University of Pennsylvania, New York University and Yale University, found that the density of cells in one region of the brain predicts how willing people are to take financial risk.

This research appears to “provide the first link between brain structure and risky choice,” says neuroscientist Scott Huettel of Duke University, who wasn’t involved in the study.
Zweig, also the author of the 2007 book, Your Money & Your Brain, then got involved in the research:
I recently volunteered as a guinea pig in the same experiment, which has been run on more than five dozen people; the results have been controlled for age and sex. A scan of my brain showed that the thickness of gray matter in my right posterior parietal cortex—a small area toward the rear crest of my skull—is slightly below average.

Sure enough, when the researchers tested my risk tolerance, they found that it is also slightly below average.

“People who have a larger chunk of gray matter in this area will, on average, have a greater tolerance for financial risk,” says neuroscientist Paul Glimcher of NYU, one of the study’s authors.
https://jasonzweig.com/so-you-think-youre-a-risk-taker/
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
User avatar
Lawrence of Suburbia
Posts: 691
Joined: Mon Aug 08, 2022 12:04 pm

Re: Improving your risk tolerance

Post by Lawrence of Suburbia »

Now, it hasn't been "tested" yet (stocks have been pretty upwards-moving since) but largely getting out of actively-managed funds and into indexed ones -- does Vanguard Target 2025 (VTTVX) count? -- I at least feel like my risk tolerance has increased a bit. Before Bogleheads, and going back decades, I was always going in and out of various conservative balanced funds, which means I'm poorer than I really should've been.

I fancy that I now "own the haystack" as Mr. Bogle once put it; I plan to leave most of my $ there 'til I assume room temperature.
74% VTHRX/8% DODWX/12% TIAA Traditional/6% SWVXX
User avatar
WoodSpinner
Posts: 3499
Joined: Mon Feb 27, 2017 12:15 pm

Re: Improving your risk tolerance

Post by WoodSpinner »

ckangas wrote: Thu Jun 08, 2023 12:10 pm
km91 wrote: Thu Jun 08, 2023 11:43 am Yep, number one thing you can do to improve risk tolerance is to stop looking at the value of your investment accounts so much, particularly in an economic/market downturn.
Is this the case? Rick Ferri noted that he looks at his portfolio returns many times a day since it's displayed on screens he uses for work. But suggested that it was irrelevant because he wouldn't be taking actions based on that result.

I think the opposite case could be made; looking at your returns makes you behaviorally separate that activity from buying/selling. Essentially building up the habit of checking performance, but not taking actions.

I'm not trying to argue one way or another. And perhaps it all comes down to the individual. But it seems complex enough to where I'd like to see a study or further research before trusting the conventional wisdom on the topic too much.
FWIW, this is my approach ….

I update my Portfolio totals daily as part of my Quicken Downloads. The key for me is to nit take any actions other than the prescribed rebalancing bands in my IPS.

I mentally separate the Portfolio Movements from my responses.

Works well so far…

WoodSpinner
WoodSpinner
Mr. Buzzkill
Posts: 305
Joined: Mon Mar 28, 2022 8:23 am

Re: Improving your risk tolerance

Post by Mr. Buzzkill »

As I get closer to retirement, I worry about max drawdown, withdrawal rates, sequence of returns risk. Not volatility measures of returns.

If it happened once then it could happen again, or worse.

My four grandparents struggled but survived the Great Depression era of 1929 - 1944 and Great Inflation of 1966 - 1982 and I’m now confident that I too will survive anything that bad but in more comfort than they had.

I backtest to 1929 with the Simba spreadsheet (great tool!) not because it predicts the future but it lets me test my reaction to and ability to financially weather very bad scenarios based on my other personal spreadsheet that tracks current assets, spending needs, and pessimistic assumptions about social security and future returns.
A strategy that works only in bull markets isn’t much of a strategy. Anyway, four dollars a pound.
User avatar
Topic Author
martincmartin
Posts: 899
Joined: Wed Jul 02, 2014 3:04 pm
Location: Boston, MA USA

Re: Improving your risk tolerance

Post by martincmartin »

It's like you need to get to the airport for a flight. You plan to get there two hours ahead. Also, it's a 30 min drive to the airport, but you allow 45 min for the drive just in case. If the drive takes 40 min, well that's 33% longer than you planned, but you know your schedule could handle more than that.

I'm just suggesting something similar for retirement planning: know the size and frequency of drawdowns your plan can handle without running out of money. The current "need, ability and willingness to take risk" sounds like saying "leave early for the airport, without actually understanding how much of a buffer you have, then see how anxious you get when there's a little traffic and you're not sure whether the traffic will make you late or not." That just seems like a surprising hole in retirement planning to me.
deltaneutral83
Posts: 2454
Joined: Tue Mar 07, 2017 3:25 pm

Re: Improving your risk tolerance

Post by deltaneutral83 »

Figure out the amount of liquidity you need in case of a 50% downturn in equities and a job loss and then add another 10% to it. That's my educated guess. For some that's $0, for others it's 5 years in cash. The returns you get from investing (whatever asset allocation you have) will be made during the 40-50% drawdowns in equities. Your behavior over two or three 6-18 month spans will likely determine everything over 40-50 years. You are almost statistically guaranteed to have a 50% drawdown over 50 years of investing and and it's statistically guaranteed to have a 40% drawdown over 50 years. We've had both the past 23 years on separate occasions packed almost back to back. Just my $0.02.
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: Improving your risk tolerance

Post by secondopinion »

Fallible wrote: Thu Jun 08, 2023 6:50 pm
martincmartin wrote: Sat Jun 03, 2023 5:59 pm ...
Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education. ...
Education may increase risk tolerance, which can change often throughout a lifetime, but it's really more complicated than that because human beings are so complicated.

From what I've learned and experienced over many years of investing (passive, of course :happy) tolerance for risk can be increased by learning more about risk and experiencing it during a bear market - then again, knowing more about investing risk may lead to taking less of it or even none at all. What we learn depends on our unique needs and abilities and how well we understand them, how well we know ourselves and then stay true to ourselves.

But it gets more complicated, i.e., brain structure, as author and WSJ columnist Jason Zweig wrote in 2014 about new research and then experienced it personally (boldface mine):
Because people have a remarkable ability to distort their own memories, investors who panicked in 2008 and 2009 may be kidding themselves about their ability to survive another crisis. And the typical “risk-tolerance quiz” used by financial advisers is almost useless in predicting how you will react to losses, because perceptions of risk vary so widely.

Increasingly, scientists are tackling the problem. A new study, just published in the prestigious Journal of Neuroscience by a team of researchers at University College London, the University of Sydney, the University of Pennsylvania, New York University and Yale University, found that the density of cells in one region of the brain predicts how willing people are to take financial risk.

This research appears to “provide the first link between brain structure and risky choice,” says neuroscientist Scott Huettel of Duke University, who wasn’t involved in the study.
Zweig, also the author of the 2007 book, Your Money & Your Brain, then got involved in the research:
I recently volunteered as a guinea pig in the same experiment, which has been run on more than five dozen people; the results have been controlled for age and sex. A scan of my brain showed that the thickness of gray matter in my right posterior parietal cortex—a small area toward the rear crest of my skull—is slightly below average.

Sure enough, when the researchers tested my risk tolerance, they found that it is also slightly below average.

“People who have a larger chunk of gray matter in this area will, on average, have a greater tolerance for financial risk,” says neuroscientist Paul Glimcher of NYU, one of the study’s authors.
https://jasonzweig.com/so-you-think-youre-a-risk-taker/
If that part of the brain is responsible for risk tolerance, then why am I not so impacted negatively for risk (or is long-term risk aversion my problem, which I might agree)? The short-term risk aversion is not where I struggle.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Fallible
Posts: 8795
Joined: Fri Nov 27, 2009 3:44 pm

Re: Improving your risk tolerance

Post by Fallible »

secondopinion wrote: Sun Jun 11, 2023 6:45 pm
Fallible wrote: Thu Jun 08, 2023 6:50 pm
martincmartin wrote: Sat Jun 03, 2023 5:59 pm ...
Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education. ...
Education may increase risk tolerance, which can change often throughout a lifetime, but it's really more complicated than that because human beings are so complicated.

From what I've learned and experienced over many years of investing (passive, of course :happy) tolerance for risk can be increased by learning more about risk and experiencing it during a bear market - then again, knowing more about investing risk may lead to taking less of it or even none at all. What we learn depends on our unique needs and abilities and how well we understand them, how well we know ourselves and then stay true to ourselves.

But it gets more complicated, i.e., brain structure, as author and WSJ columnist Jason Zweig wrote in 2014 about new research and then experienced it personally (boldface mine):
Because people have a remarkable ability to distort their own memories, investors who panicked in 2008 and 2009 may be kidding themselves about their ability to survive another crisis. And the typical “risk-tolerance quiz” used by financial advisers is almost useless in predicting how you will react to losses, because perceptions of risk vary so widely.

Increasingly, scientists are tackling the problem. A new study, just published in the prestigious Journal of Neuroscience by a team of researchers at University College London, the University of Sydney, the University of Pennsylvania, New York University and Yale University, found that the density of cells in one region of the brain predicts how willing people are to take financial risk.

This research appears to “provide the first link between brain structure and risky choice,” says neuroscientist Scott Huettel of Duke University, who wasn’t involved in the study.
Zweig, also the author of the 2007 book, Your Money & Your Brain, then got involved in the research:
I recently volunteered as a guinea pig in the same experiment, which has been run on more than five dozen people; the results have been controlled for age and sex. A scan of my brain showed that the thickness of gray matter in my right posterior parietal cortex—a small area toward the rear crest of my skull—is slightly below average.

Sure enough, when the researchers tested my risk tolerance, they found that it is also slightly below average.

“People who have a larger chunk of gray matter in this area will, on average, have a greater tolerance for financial risk,” says neuroscientist Paul Glimcher of NYU, one of the study’s authors.
https://jasonzweig.com/so-you-think-youre-a-risk-taker/
If that part of the brain is responsible for risk tolerance, then why am I not so impacted negatively for risk (or is long-term risk aversion my problem, which I might agree)? The short-term risk aversion is not where I struggle.
I'm not sure I understand your question as to how you could be affected individually. Zweig was able to learn how this early research related to his own risk tolerance by volunteering to be tested, an opportunity not many of us have. It's interesting, though, that other later research has also shown links between various regions of the brain and tolerance for risk.

I also liked that Zweig included this:

"But, as psychologist Elke Weber of Columbia Business School points out, risk tolerance varies across activities and contexts and isn’t 'a fundamental trait.' Someone can like gambling in Las Vegas and still invest primarily in cash and bonds."
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
nyejos11
Posts: 218
Joined: Sun Jul 03, 2022 7:04 am

Re: Improving your risk tolerance

Post by nyejos11 »

When the stock market prices drop by 50 percent in a downturn, and you panic and sell, do you ever stop to think- Who is the guy with balls of solid rock, who is buying them? Because there is always someone on the other side of the sale. We don’t get stocks from a vending machine and then sell them back to one. Jack Bogle drove this point home
averagedude
Posts: 1772
Joined: Sun May 13, 2018 3:41 pm

Re: Improving your risk tolerance

Post by averagedude »

There are only two ways to improve your risk tolerance:
1. Education. Specifically Math,Psychology, Biology, and History.
2. Looking through the lens of rose collared glasses.
snowday2022
Posts: 698
Joined: Sun Jan 16, 2022 1:48 pm

Re: Improving your risk tolerance

Post by snowday2022 »

Get skills that will enable you to remain employed in almost any economic situation.
GAAP
Posts: 2548
Joined: Fri Apr 08, 2016 12:41 pm

Re: Improving your risk tolerance

Post by GAAP »

For me, experience helps -- both my own, and watching what my mother did (~90-95% equity in her 80's). 1987 was an eye-opener, the dot-com bubble less so. By 2008, staying the course was fairly easy, and more recent years don't even count.

The other key thing for me is stubbornness -- I'm too stubborn to make a change when bad stuff happens. That probably matches well with laziness and being unwilling to invest the effort to change my portfolio due to bad things happening.

This is not to say that I haven't refined my approach over the years -- but that has been due to self-education, not market events.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
User avatar
Calvert
Posts: 228
Joined: Wed Oct 19, 2022 8:35 am

Re: Improving your risk tolerance

Post by Calvert »

martincmartin wrote: Sat Jun 03, 2023 5:59 pm
A more practical definition of risk is the chance of running out of money in retirement. From this point of view, stocks can be *less* risky than bonds, because over the long run, stocks almost certainly grow more than bonds.

Many of us bogleheads believe in learning about finance enough to understand what to expect, then make our own choices, DIY style. In that spirit, our risk tolerance isn’t fixed, but can be improved through education.
I applaud your wanting to help folks. I retired (mostly) at the end of 2021, so my concern is "running out of money in retirement", and maybe also not spending enough ... :D

"Risk tolerance" is a clunky concept to me. Lots of things maybe mashed together.
I would rather look at improving my decision making so as to achieve my goal of ... not running out of money in retirement.
Now of course, my decision-making environment is not constant. I'd call out 2 situations: 1) A crisis such as stocks going down 50%; 2) The general grind of wanting to tweak (optimize / 2nd guess) my setup.

So ... how does one improve their decision making? Here are my thoughts ... :happy

1) Gain personal experience. I'm pretty confident that people with situational experience make better decision than folks without. There is an amazing amount of information in repeated personal experience. You can't really fully convey it to others. Of course, for events that happen once every 30 years ... this isn't a great method.

2) Educate yourself. I call this learning how people have "organized" past events. This is the educational process. Folks organize the chaos of reality (of the past) to help predict the future. This is pretty good as it tends to go thru a polishing/vetting process as people debate the evidence. The downside is that these organized "models" must be limited to a small set of factors (like a map vs the details of the earth), or you just get back to the chaos of reality. Others would say that they also only rely on data "from the past". I think that's a lame argument because those past observations are actually from the real "system". Would it be better to fake some? Anyway ... the simplification of reality by "book learning" can make it disconnected from personal reality ... aka It can be a small voice when my other experiences say RUN ... during a 50% drawdown.

3) Learn from other people's experiences. Their situations, thinking, and stories. In a trusted environment, like this forum, the social superpower of humans really shines through. I find it ironic that the "value of the forum" is rarely discussed directly. Perhaps people just know. I really enjoy going back and reading the various thoughts and debates. Admittedly it takes some time, but did you know that you can actually read what real folks were saying during the 2008 GFC? You can even see what some of them are saying today ... :D I find this type of "input" more impactful (during a crisis) than "Book leaning", but a bit less vetted. AKA, some loud voice can skew things.

Just some thoughts on how folks can improve their decision-making during a drawdown (or before):
1) Have you been thru one? How did that work out for you?
2) What does that past data say you should do?
3) Go to the forum. What are people thinking? What did they think in 2008?
just tryin' to understand the obvious
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: Improving your risk tolerance

Post by nedsaid »

I don't know, it seems like I have to do a number of things in life that I have low tolerance for. Don't particularly like going
to the dentist, don't like the novocain shots, don't like the dentist drill, sometimes don't even like the dentist. If I want to maintain good dental health, it is a pretty good idea to visit the dentist though my "dentist tolerance" is sometimes pretty low.

I don't particularly like flying. I belt myself into the seat just hoping that the plane will go airborne before we run out of runway. Don't like the turbulence, don't like economy class sets, the food could be better but if I want to arrive at a distant destination taking hours and not days or weeks so I need to get over my "airplane tolerance." I suppose flying is preferable to sea sickness.

Don't get me started on Doctors. The waits, being weighed, having tests done on you, being prodded and poked and examined isn't top on the list of things I like to do. If I want to be healthy, I might need to get over my "Doctor tolerance."

Seems odd, I never fill out a survey measuring my "Dentist tolerance" before a Dentist visit. When I buy an airline ticket,
there is no "airplane tolerance" survey. Somehow, I don't think the Doctor cares much for whatever "Doctor Tolerance" that I have, he just orders things up and I can't worry too much about what the insurance won't cover.

We really need to look at this whole idea of risk tolerance, not sure that it is a correct concept. Successful investing
involves doing things that are not emotionally fulfilling. Sort of like sitting up straight, eating your spinach, and keeping a stiff upper lip. Like a good Boy Scout, doing your duty to God and Country and obeying the Scout Law.
A fool and his money are good for business.
secondopinion
Posts: 6008
Joined: Wed Dec 02, 2020 12:18 pm

Re: Improving your risk tolerance

Post by secondopinion »

nedsaid wrote: Tue Jun 13, 2023 9:51 am I don't know, it seems like I have to do a number of things in life that I have low tolerance for. Don't particularly like going
to the dentist, don't like the novocain shots, don't like the dentist drill, sometimes don't even like the dentist. If I want to maintain good dental health, it is a pretty good idea to visit the dentist though my "dentist tolerance" is sometimes pretty low.

I don't particularly like flying. I belt myself into the seat just hoping that the plane will go airborne before we run out of runway. Don't like the turbulence, don't like economy class sets, the food could be better but if I want to arrive at a distant destination taking hours and not days or weeks so I need to get over my "airplane tolerance." I suppose flying is preferable to sea sickness.

Don't get me started on Doctors. The waits, being weighed, having tests done on you, being prodded and poked and examined isn't top on the list of things I like to do. If I want to be healthy, I might need to get over my "Doctor tolerance."

Seems odd, I never fill out a survey measuring my "Dentist tolerance" before a Dentist visit. When I buy an airline ticket,
there is no "airplane tolerance" survey. Somehow, I don't think the Doctor cares much for whatever "Doctor Tolerance" that I have, he just orders things up and I can't worry too much about what the insurance won't cover.

We really need to look at this whole idea of risk tolerance, not sure that it is a correct concept. Successful investing
involves doing things that are not emotionally fulfilling. Sort of like sitting up straight, eating your spinach, and keeping a stiff upper lip. Like a good Boy Scout, doing your duty to God and Country and obeying the Scout Law.
If one looks at risk as vitamins, one can be deficient from having too little that it hurts portfolio health; likewise, too much is toxic and can hurt portfolio health. But this does vary from person to person.

Too much risk can be destructive; it is not the same as merely not liking what is good for you. Some people have an aversion and find there is a concrete reason for it. Of course, it is hard for most people to soundly assess money choice.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Improving your risk tolerance

Post by Kevin M »

tl;dr

I like Larry Swedroe's breakdown of "risk tolerance" as the ability, willingness, and need to take risk. These are difficult to asses, but assumiing one could assess them accurately, ability and need can't be "improved". Willingness to take risk can be improved, as it's a behavioral thing.

I became acutely aware of my willingness to take risk during late 2008. Since then, I have not experienced any significant emotional turmoil from subsequent stock market declines, or even the recent bond market decline. All of these have seemed like a cake walk compared to 2008, and I simply view them as buying, uh, I mean rebalancing opportunities. So I kind of view 2008 as a willingness to take risk training exercise.

My need to take risk was quite low, and by ability relatively high in late 2008, but my willingness was sorely tested. Since then I'd say that my need has decreased even further, due to being older, and my ability has correspondingly increased (they tend to move in opposite directions once you get to a certain point of wealth).
If I make a calculation error, #Cruncher probably will let me know.
Fallible
Posts: 8795
Joined: Fri Nov 27, 2009 3:44 pm

Re: Improving your risk tolerance

Post by Fallible »

Risk tolerance is simply about the emotional, psychological side of investing, which is also why it's not so simple. When Buffett and Bogle talked about investing "being simple, but not easy," the "not easy" part referred to the emotional, behavioral side. Larry Swedroe, In his "guide to ability, willingness (risk tolerance) and need to take risk," separated the objective ability from the subjective willingness, i.e., even if one had the ability to take risk, one's emotional reaction to it in the form of market crashes also needed to be understood.

Jonathan Clements has written this about risk tolerance and emotions:
Among our many emotion-tinged financial decisions, perhaps the most important is settling on our portfolio’s basic stock-bond split. On social media, I’ve seen commentators lambast others for being too aggressive or too conservative. Such criticism presumes there’s an objectively correct asset allocation for everybody. But how could that be when we need to consider that tricky, subjective notion known as risk tolerance? When each person’s individual feelings about losses and gains factor into the choice, none of us should claim our asset allocation was solely a rational decision—and nobody should be attacking others for somehow getting it wrong.
https://humbledollar.com/2020/08/gettin ... ses-test_7

Morgan Housel, who recently wrote The Psychology of Money that's been discussed on the forum, also wrote a blog, "The Psychology of Risk Tolerance & The Three Sides of Risk":
We’re often taught as kids that money is a math-based field with one right answer. But in reality, we should think of it as something messy and inconsistent. You have to understand your own views on money and investing because it’s different for different people. 

“Equally smart people with the same information can come to vastly different answers of what’s right for them,” said Morgan. “Because they have different goals and different incentives...they view the world through a different lens.”

That’s why it’s important to view money and investing as something like “psychology or sociology where it’s messy and it’s mushy,” Morgan said. There’s no one right answer to a specific problem.
https://www.financialplanningassociatio ... pisode-218

I do agree that educating ourselves about investing and its risks can improve our risk tolerance in the sense of understanding how it affects us individually and how we feel about the risk. Depending on the individual, education can also lead us to take less risk or none at all (don't invest, and lots of folks don't). In my own case, in the '80s, I feared the stock market so put money in then high-interest CDs; but I kept reading and learning about stocks and risk and that led to discovering Jack Bogle and simple, low-cost index funds. They not only looked right, they also felt (risk tolerance) right for me.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: Improving your risk tolerance

Post by nedsaid »

secondopinion wrote: Tue Jun 13, 2023 10:51 am
nedsaid wrote: Tue Jun 13, 2023 9:51 am I don't know, it seems like I have to do a number of things in life that I have low tolerance for. Don't particularly like going
to the dentist, don't like the novocain shots, don't like the dentist drill, sometimes don't even like the dentist. If I want to maintain good dental health, it is a pretty good idea to visit the dentist though my "dentist tolerance" is sometimes pretty low.

I don't particularly like flying. I belt myself into the seat just hoping that the plane will go airborne before we run out of runway. Don't like the turbulence, don't like economy class sets, the food could be better but if I want to arrive at a distant destination taking hours and not days or weeks so I need to get over my "airplane tolerance." I suppose flying is preferable to sea sickness.

Don't get me started on Doctors. The waits, being weighed, having tests done on you, being prodded and poked and examined isn't top on the list of things I like to do. If I want to be healthy, I might need to get over my "Doctor tolerance."

Seems odd, I never fill out a survey measuring my "Dentist tolerance" before a Dentist visit. When I buy an airline ticket,
there is no "airplane tolerance" survey. Somehow, I don't think the Doctor cares much for whatever "Doctor Tolerance" that I have, he just orders things up and I can't worry too much about what the insurance won't cover.

We really need to look at this whole idea of risk tolerance, not sure that it is a correct concept. Successful investing
involves doing things that are not emotionally fulfilling. Sort of like sitting up straight, eating your spinach, and keeping a stiff upper lip. Like a good Boy Scout, doing your duty to God and Country and obeying the Scout Law.
If one looks at risk as vitamins, one can be deficient from having too little that it hurts portfolio health; likewise, too much is toxic and can hurt portfolio health. But this does vary from person to person.

Too much risk can be destructive; it is not the same as merely not liking what is good for you. Some people have an aversion and find there is a concrete reason for it. Of course, it is hard for most people to soundly assess money choice.
I agree that there is a happy middle ground here, one needs to take enough risk so that a portfolio has a good chance of real growth after inflation but not so much that the portfolio blows up! It is a matter of doing the right thing and not the feel good thing. I do believe that a person's risk tolerance should be a factor in portfolio construction but of secondary importance. Sometimes an investor has to do things that are uncomfortable emotionally.
A fool and his money are good for business.
Florida Orange
Posts: 1152
Joined: Thu Jun 16, 2022 2:22 pm

Re: Improving your risk tolerance

Post by Florida Orange »

averagedude wrote: Sun Jun 11, 2023 8:37 pm There are only two ways to improve your risk tolerance:
1. Education. Specifically Math,Psychology, Biology, and History.
2. Looking through the lens of rose collared glasses.
3. Have more money.
Post Reply