Is Your Risk Tolerance Too High?

Is Your Risk Tolerance Too High?Is your risk tolerance too high? This is a tricky question because risk tolerance can change. In my 20s and 30s, I had a high risk tolerance and invested 100% in the stock market. Now that I’m older (and much wealthier than before), I can’t stomach a huge stock market drop anymore. At this point, it is inappropriate to invest everything in equity. I’d probably panic sell at the worst time.

Recently, I’ve been questioning my risk tolerance level. I haven’t looked at it in a couple of years and things change. I’m just a little older, but I am a lot more conservative now. The world economy has been on an extended run for many years and now it is starting to stumble. Life changes so we need to make sure to update our investment style accordingly.

Our asset allocation didn’t align with my risk tolerance anymore so I had to make some adjustment. Today, I’ll tell you why I’m getting more conservative, review my investment history, and share our targeted asset allocation at the end. Read on…

Risk tolerance dropping

The last time I examined my risk tolerance was in 2017. At the time, I changed our targeted asset allocation to 80% equity and 20% bond. That wasn’t too long ago and our life circumstance hasn’t changed much. However, I feel much more conservative now. Most of this is due to current events and future changes. Normally, we have 3 months of expense in cash, but we need more liquidity for a while. Here are the reasons why.

  • Consolidating properties – We are moving into our rental duplex. Our housing expense should drop in the long run, but we need more cash in the short term. We’re putting 2 condos on the market soon and we’ll have to carry 3 mortgages until they’re sold. Yikes! I’ll also have to return the rental deposit to our tenants. Then, we need to fix up the duplex and buy some new furniture. So we need a bigger cash cushion for a while.
  • Mrs. RB40 retires – Mrs. RB40 isn’t quite ready to retire yet and may continue to work for a few more years. However, we’ll have to get ready for a drop in income. She may pull the plug next year if her working environment deteriorates.
  • ParentMy mom just moved to Chiang Mai, Thailand. We’ll send some money to help out occasionally. In the future, my dad probably will need to hire someone to help out and that’ll increase their living expense.
  • World economy – The US economy is still holding up well, but everything else is slowing down quite a bit. The Trump corporate tax cut boosted profits and propped up the US stock market. Things are still good here, but how long can it last?
  • Midlife – Recently, I turned 45. I’m happy with where I am in life and I want to stay here. I don’t want to take unnecessary risks anymore. More money isn’t going to change our life, but less money would make it a lot more stressful. We’re set in our ways now.

All these added up. I’m a more conservative investor today than just 2 years ago. I need to adjust our asset allocation accordingly. Now, let me share my investing experience with you.

The Dot Com Bubble

I started investing in the stock market in 1996, right after I started my engineering career. It took me a few years to max out my 401k and Roth IRA contribution. After that, I started investing in a taxable account. The dot com bubble was in full swing by then. Many engineers became paper millionaires from stock options and grants. I was still young so I didn’t have much invested at that point, probably around $100,000 at the height of the bubble. It seemed like a ton of money then, but not now.

The drop in net worth was very scary because it was the first time I went through a stock market crash as an investor. The big mistake I made was to invest most of my 401k in my employer’s stock. As you can see from the chart below, the stock dropped like a rock in 2000 and went sideway ever since. (Although, they have quite well after I quit in 2012. I must have been holding them back.)

Intel stock

Luckily, I didn’t panic sell like many investors. At the time, my job was relatively secure so I could afford to hold on to my stock investments. I stopped investing in my employer’s stock and gradually moved my 401k to index funds. During the next few years, I kept contributing to my retirement savings, but didn’t really add much to my taxable account. We put extra money toward our mortgage instead of investing in the stock market.

Lessons learned after my first bear market

  1. Don’t invest in your employer’s stock. My employer already gave me stock options, stock grants, stock discount, a job, health insurance, and other benefits. It was a huge mistake to put my 401k in the same stock. That’s putting all the eggs in one basket and it backfired on me.
  2. Keep investing after the stock market crashed. I kept contributing to my 401k and eventually, it recovered and surpassed the previous high. Some of my friends stopped investing in the stock market and they didn’t benefit from the recovery. If I could do it over again, I’d invest in stock instead of paying extra on the mortgage.

The Global Financial Crisis

The global financial crisis was a huge headache for everyone, but I didn’t stress out much. I went through the dot com bubble and I assumed the stock market would recover at some point. In 2007, both of us had secure jobs and we could weather the storm. With that assumption, we doubled down on the stock market. We kept investing in our 401k, Roth IRA, and taxable account. Our net worth dropped 25% in 10 months, but we kept shoving every extra dollar we had into the stock market.

Of course, we didn’t handle it perfectly. We made a big mistake and purchased our condo at the height of the housing bubble. I’m putting it on the market soon and we’ll be lucky to make any money. It would have been much cheaper to buy after the housing bubble popped. There were short sales and foreclosures everywhere. Actually, we did purchase 2 investment properties when the value was reasonable. I figured we’d average down and it worked out. These properties should generate a nifty profit.

RB40 net worth history

More lessons learned

  1. Buy when there’s blood is in the street. The financial crisis crash was bad, but my experience from the dot com bubble told me to keep investing. Buying properties after the housing crash was a good move too. This strategy worked and our net worth quadrupled since the low point in 2008.
  2. Good steady income gave me the confidence to weather the volatility. I did not lose any sleep during the global financial crisis. Our jobs were secure so we felt safe.
  3. I wished we had more money to invest during the financial crisis. Our asset allocation was 100% stocks during this period. It would have been better if we had some bond and cash. Our portfolio wouldn’t have dropped as much and we’d be able to buy more stocks during the downturn.

2018 mini-crash

How did you handle the mini-crash last Christmas? I was busy in Thailand so I couldn’t pay much attention to the stock market. Occasionally, I checked the stock market and it kept dropping. I have to admit I was getting nervous. Luckily, it was difficult to make changes from Thailand so I left our investment alone for the most part. I sold a few stocks to reduce our tax bill, but that was it. This drop made me realize that I need to reassess my risk tolerance.

S&P500 mini crash

Luckily, the stock market recovered nicely since then. Once I got back to the US, I waited for an opportunity to reduce our exposure to the stock market. Around the end of January, I figured our portfolio did well enough and moved quite a bit of our stock investment to the money market fund. Our portfolio will underperform the S&P 500 if the stock market keeps rising, but I’m fine with that this year. We’ll reassess the situation again next year and see where we are in life. Hopefully, our finance will be a bit more stable and maybe I’ll have higher risk tolerance again.

Is your risk tolerance too high?

Have you taken a close look at your risk tolerance lately? If it’s been a while, your risk tolerance might be a little high. Your asset allocation and investment strategy are derived from risk tolerance so it is important to get it right. Here are some reasons why risk tolerance can change.

  • Age– I don’t know about you, but I’m getting more conservative as I get older. When you’re young, you have a lot of time to recover from a loss. At 45, I can’t afford to stumble too hard.
  • Income stability– Our income isn’t stable anymore. My blog income was awesome in 2018, but it doesn’t look good this year. Currently, we can support our lifestyle without drawing down our investment portfolio, but that will change after Mrs. RB40 retires. We need some buffer in the form of cash and bonds so we don’t have to sell stocks at the worse time.
  • Investing experience– I’ve been through two big market crashes and came out ahead. This gives me the confidence to avoid panic selling. We’ll only sell if we need the money.
  • Life changes – retirement, kids, etc..
  • Investing horizon– We probably need to sell some investment to help fund our kid’s college education, but he is only eight years old. There is plenty of time to recover from market volatility. Once our kid is in high school, we’d need to be more conservative with his college fund.

I suspect many investors think they have high risk tolerance after such a long bull market. It’s easy to keep investing when the stock market is going up, but can you do it when the market crash? You won’t know how you’ll react unless you’ve gone through a tough bear market.

Assess your risk tolerance

Fortunately, you don’t have to figure everything out yourselves. If you need help, you can hire a good financial advisor or seek help from reputable companies on the internet. Vanguard has a very helpful investor questionnaire. Check it out if you need help with your asset allocation. There are other helpful sites too. You can see them in this post – How to Figure Out Your Asset Allocation.

I went through Vanguard’s questionnaire and they recommended 60% stocks and 40% bonds for us. I went a bit overboard at the end of January and our bond and cash allocation is now 48%. That’s too high. I’ll try to nudge it down to 40% by the end of 2019. Also, we should have some cash infusion from selling our properties. I’ll need to invest that in real estate crowdfunding and dividend stocks. It’ll take some time to execute, though.

When was the last time you took a good look at your risk tolerance? Can you keep investing through a market crash and subsequent bear market?

*If you need help keeping track of your investments, try using Personal Capital to help manage your investment accounts. It’s very easy to check on your investment and I log on almost every day. Check them out if you don’t have an account yet.

Asset allocation Personal Capital

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

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100 thoughts on “Is Your Risk Tolerance Too High?”

  1. After 2018’s mini correction (very mini), I decided that I wanted to increase my non-correlated assets insofar as I was way out of my true comfort zone as it relates to risk tolerance.

    There is an entire generation of investors who have never seen a bear market, and that to me, is terrifying!

  2. Everything is relevant. Relevant to location, age, temperament (as apposed to risk tolerance as Warren Buffett will say), family size, and so much more.

    It’s great to hear from a variety of sources from varying angles. We win when we are open to learning from each other. No one answer or angle is correct. We share what’s worked for each of us, along with some things haven’t.

    Caution be to one who makes assumptions about another. For we don’t know all that goes into someone else’s decisions until we’ve walked a mile in their moccasins.

    There is plenty of discussion on the topic of retirement and the age at which it starts. Forty is obviously a number emphasized here. However, some people get “into the game” somewhat late and don’t start investing until around forty.

    Question: If this person doesn’t plan to retire, but is on the path to FIRE to obtain the lifestyle open to the saver/investor in this category, what type of risk tolerance, therefore, asset allocation is best to start?


  3. I see lots of misstatements on comments here which is a bit bothering. First when people say they are switching to bonds or cash or real estate to “reduce their risk.” My friends there is risk in all investments but the risks are different. Bonds can have interest risk, and credit risk. If you keep your cash in a mattress, I have got bad news for you, inflation risk is one of the biggest risks you face. We don’t even need to talk about Venezuela’s 1,000,000% percent a year inflation for some concrete examples here. Stocks can provide excellent inflation risk protection, so don’t overlook that.
    The second thing I hear is how people’s “risk tolerance” is suddenly increasing or decreasing. What this translates to is “I’m timing the market and think stocks will fall.” Even Warren Buffet knows he can’t time the market, why do you think you can?
    You should know how much pension and SS you get or will get, then have a good idea how much other income you need to fill in the gap and how many years you have until you need that money, and calculate allocations from that. That information should determine your “risk tolerance.” As you get old update it, but it won’t likely change much in a short time, even if the stock market crashed yesterday. Its generally recommended to greatly reduce stock risk a few years before retirement, then gradually increase it as you age.
    Also, do not overlook health insurance cost. I pay about $18,000/year for a group plan for my wife and I, but this not include deductibles, which is $4000 in my case. Since I’m self-employed now, this is deductible, but still a significant cost. It will be lower at 65, but never go away. (This is on a group plan. Under the Affordable Care plan, it would be higher. )

  4. I’m definitely on the opposite end of the “risk too high” spectrum. I think it’s because of my Asian upbringing and growing up in poverty. You natually develop a fear-based mindset and as a result, end up skewing towards the conservative side. Sure, you might miss out on some opportunities, but it also helps you sleep at night 😉 Since we retired, I haven’t lost one night of sleep on the markets. The only minor panic I had was from quitting my job–again with the Asian upbringing–very hard to give up a job when you’ve been taught having a strong work ethic is the most important thing ever. But now that we’ve been retired for almost 4 years, I’m a lot more optimistic, but being risk adverse all these years has served me quite well 🙂

  5. The sad truth is that everyone undervalues income and downside risk protection in a bull market. It’s understandable, common, and…not as smart as it could be.

    Personally, I think that some kind of market correction or recession is on the way, and I’m ready. I stopped buying into new stock positions last year, and am waiting for the discounts. Any market drop over 10% will be my buying opportunity.

    Also, having a stable and secure job makes it very easy to have this kind of attitude. I really empathize with people whose income isn’t as secure/predictable.

  6. We’re at 42/58 stock to bond ratio. We’ve missed out on some opportunities — but as retirees with just a small pension income, we take sequence of returns risk to heart. Aside from a pile of cash we have invested in lithium as our “lottery ticket” I think we’re pretty conservative.

  7. I think the shift in thinking is a combination of age and net worth. As both go up, you don’t need to take unnecessary risks and should go on a conservative glide path.

    Bernstein famously said when you won the game stop playing.

    The other thing is when you have larger and larger amounts of money “in play” you can have wild swing in net worth as even a small % drop in market can lead to some eye popping losses (whereas when starting out a larger % drop in market may end up being a small total amount of money lost since less at play)

  8. I like your move to 60/40.

    I am 48. We had moved to 60/40 about age 45 from 70/30. I have actually moved back to 65/35 recently. Some of my “retire very early” plans were squashed by my wife staying home. Totally agreed upon, but it looks like I’ll be working at least through 54-55. So, inched up a little. I hope to be 50/50 when retired (at any age).

    50% stocks/50% bonds
    50% US/50% International stocks
    100% US bonds

    The “I’m not sure, so I’m going to be 50-50 and always be “right”.

    Thanks for the update.

  9. The drop in December made me forget what I was doing and threw a bunch of cash at our index funds. I was supposed to be holding the cash for an Ally bonus but oh well! The investment at $10 below my average per share cost was worth it.

    We don’t have to rely on the market for our income so we’re about where you were, sort of, ten years ago. We have reasonably stable income for now (taking it one year at a time) and as long as that holds steady, we will continue to put money in the market. We’re holding some bond funds but mostly we’re aggressively in stocks. We’re in our growing phase right now.

    I know too well that a lot of things COULD go wrong but I am working really hard at not focusing on all those what ifs.

  10. I have always had a very high risk tolerance. Our savings have been mostly in retirement accounts, so I figured we had decades of growth before we had to think about getting conservative. At age 42, we still hope to have decades, especially because we hope to not use the money and instead cashflow from rentals, pension, and other side hustles.

    However, recently I’ve been investing money that we plan to use before retirement. Because this is a shorter span, I’m finding myself being much more conservative. I’m going with a 60/30/10 stocks/bonds/REITs mix. I think that’s conservative enough for now. I’ve never actually sold a stock when it’s gone low (that I remember), so I don’t think I would in any kind of crash. Typically, I buy more and dollar cost average.

    • I had high risk tolerance when I was young, but now I’m more conservative. The economy seems to be turning, but who knows. I’m willing to give up some gains at this point to avoid the pain.
      What are you investing in? I’m curious now.

      • This isn’t set in stone, but I’m roughly thinking:

        VTI – 20.00%
        VB – 20.00%
        VEA – 20.00%
        BND – 30.00%
        VNQ – 10.00%

        I like the small company (VB) because VTI is heavily weighted to large companies, which are increasing the big 5 tech companies. I think that’s the only thing that would be a big mystery.

  11. Haha, my risk tolerance is pretty low, so it was tough for me to choose a targeted retirement fund, since that would necessarily lead to some higher risk options. But I’m getting a late start on saving in earnest for retirement, so it’s time to take a bit more of a risk and pray that Vanguard knows what it’s doing.

  12. I was just reading the Wealthy Accountant about the coming possible collapse in China. He is recommending carrying zero debt (great advice!) and having 2 years of expenses in cash (less common advise). It is good that we’ve had a mini-crash to wake everyone up and now is a great chance to redo the asset allocation if needed. Things have been relatively calm for so long that I believe we’re a little off of our guard.

    • Our debt load will be down significantly after we sell our properties. The duplex has a pretty small mortgage and we’re comfortable with owing that much. It’d be great to have 0 debt someday.

  13. we’re in a very similar scenario right now. mrs. smidlap isn’t making much but i’m still working. last fall i went to 15-20% cash before the big dip. we’re 50 and 55 in my house and basically living off my cash flow from my job. our most recent allocation is 19% cash or equivalents, 42% individual stocks, 24% index fund stocks (US and international combined), and 15% preferred stocks in place of where people would hold bonds. that 19% would allow us to live 4-5 years comfortably.

    my only comment on your recent move towards cash is that i hope you’re getting 2+% on that cash. i use ally savings that pays 2.2% and is FDIC insured. i noticed they have a 12 month CD paying 2.75 which has my interest as well. you said it best that more money wouldn’t make your life much better but a lot less would make it worse!

  14. Wow, what a post! I’ll have to read it again. You should publish it and send it to a) all of your fans ,b) business schools, so that they can discuss it in class!
    So much good advice out there if you know where to look. The advisors and economists on the PBS show “Wealth Track” have invaluable advice each week. Watch it and you can say to yourself, “ok, I’m in good shape.”
    And no panic selling people! Get that allocation to where you can sleep at night. But I have to say this-at my old, ripe age, I wish I didn’t allocate so conservatively the past 10+ years. In my research, there are advisors out there who say to older clients, go ahead and be 70-80% in stocks. It’s all whatever you can stomach. Leave it there, don’t sell. No matter what happens.
    Much better to be into stocks than a big, fancy house or any house, tread carefully there. I am seeing disappointing returns on my one real estate investment-but everyone has to live somewhere, right?
    I’ll spare y’all anymore preaching, but if you follow what’s going on in certain readings-WSJ, Vanguard’s website, etc. you’ll learn enough to set your own limits and rules. Stay diversified, keep it simple, have a good stash of cash for emergencies, stay in the markets(!), and make RB40Jr help pay for college!! Enough said. : )

    • It really depends on if you can stomach it. Lots of people can’t handle 70-80% stock. It’s too volatile.
      Once we sold our properties, I’ll feel more secure. Then, we can allocate more to stock. Thanks!

  15. Hi Joe,
    Wow, with such a huge change in your cash/bond vs stock allocation, don’t you incur a huge capital gains tax? If not, it would make for a good article how you repositioned without tax implications, because it’s the taxes that keep me from selling.

  16. No one knows when a bear market will happen. Timing the market has been shown to be a futile exercise. Buying at the highest points compared to buying at the lowest points over a 30 year period doesn’t equate to as much difference as one would think. I feel your pain though. Just the thought of losing significant gains in the portfolio brings anxiety even though the market will recover.

    I’ve been invested in marijuana stocks since 2015 which has had me suffer through 2 bear markets a year. 50% pullbacks are the norm. It’s good training for future recessions. I’ve been scaling out phasing into blue chip stocks so that I can set it and forget it. I want dividends!

  17. I may be mistaken, but in the inevitable market crash, dividend-paying companies will continue to do so. Though the dividend rate of VTSAX is below 2% today, a crash should have little effect on the actual dollar yield. Hence, I needn’t sell equities at a bad price, provided dividends, rental income, and cash throw off enough to live on.

    I have shied away from bonds because they seem too price-correlated with equities. Cryptocurrencies or cryptocurrency-backed tokens seem less correlated, but also seem to be very risky. Sadly, nobody in the US has a blockchain index fund. Does anyone in Singapore have one?

  18. Wow, What a great post and I can surely relate to you on this one. Not sure if we’re about the same age. Been there done that. I was playing the stock market game in the 90’s and luckily did not get hit hard. It’s such a stressful game and the 90’s was really the time that my patience and risk tolerance was put to test. After the 90’s tech bubble I stopped trading for about two years and came back with a totally different attitude towards investing and trading. In the past three years, I have been more conservative with my investing. More diversified and more patient. I guess this is what two kids in College can do to me. I manage my IRA’s I would say more intelligently and my stock investments more, I should say relax now. I do second your idea of not investing in your own company stock, but that’s me. I know some family members who are making a killing investing in them. I simply managed about 5-6 stocks in my two portfolios currently. With regards to the next crash, I don’t think this will happen in the next 12 months. There’s just way too many good things happening right now in the business world. New technologies specifically. I’ve always been a tech stock type of person.

  19. RB40,

    We have zero risk tolerance and probably your only readers to have zero money in the stock market. We have 100% with 4-5% municipal bonds generating 87K of tax free interest to cover expenses. We just want to hang onto our financial nut and feel NO need to take any risk since we are over age 52. We also have cash to cover 8 years of living expenses just in case. Jane was forced to retire in 2016 and she just started collecting her 52K pension last month. I will collect my 70K pension in 2 years when I retire.

    I lost some money during the dot com days and learned my lesson. Now, all of our investments are fixed interest even our 401Ks. We sleep well at nights and don’t have to worry about stock market crashes or swings. We have triple passive incomes to cover expenses from municipal bonds, pensions and future 401Ks not including Social Security. With 3 separate streams of income and each stream covers expenses, we are not worried about inflation.


    • That’s great. Why play the game when you’ve already won. I’m sure we’ll get to that point as well when we’re a bit older. Your pensions will provide a very nice retirement for your family. Great job.

  20. RB40,

    This is a great article. I completely mucked up investing during the 2008 downturn, and I am determined not to screw it up the next downturn that comes our way.

    For risk tolerance, I am running about 20% bonds, so I probably need to ratchet that up a bit since I’m 36 now. The split you mentioned (70/30) is probably a great one for me. I get the feeling we are close to another downturn, so now might be a good time to make the reallocation.

  21. Yeah, many of my friends asked me about how to increase the risk tolerance level. I just gave them a smile back and asked them to do the exact opposite things which can hamper a persons risk tolerance badly.

    Yes, there are few ways we can increase the level, but first we need to understand our investment history, go through the theory and assume the upcoming performance of our investment. The history may not repeat, but it will help to understand of what market have done in the past and what we can can expect in similar situation.

    We must change our attitude towards investing. In a market downturn, most of the investors focus on managing the losses, rather than seeking out the unforeseen opportunities. A wise taxable investor sees a market decline as an opportunity to reduce the tax payments. There he can exchange investments, show a loss in the books to reduce his taxes, without poking his nose out of the market.

    But it can be also advised that having an emergency fund of three to six months’ worth of living expenses and short-term savings may become very useful to cover any large investment related risk. In addition, you must diversify your income with a second job or similar kind of thing to become even more secure and increase your risk tolerance ability.

  22. Great article on risk tolerance. There are so many different variables that determine where your risk tolerance should be. I think the biggest one by far is your age…. as you get older you don’t have as much time left to make up for loss if it occurs. When you are young… go at it hard and shoot for the moon!

  23. I actually think mine is too high! I can lose thousands and just chalk it up to ‘whatever, nothing ventured, nothing gained’. I recently started thinking maybe this is a problem as I have basically not beaten the average over the years. Still hoping for that one that really takes off, though!

    • Right, if you can’t beat the average, then why not go with passive index funds. One less thing to worry about.
      For me, losing thousands is fine. However, what if it’s $500,000? That’s a lot of money. I can probably handle it, but at this point I’d rather be a little more conservative and sleep better.

  24. Timely stuff, Joe. We’re using Bernstein’s Simpleton’s portfolio (75% stocks, 25% bonds) and while I think we will weather whatever storm comes, I also am hoping for the correction to hit sooner rather than later. Would love to still be working when it hits.

  25. I do think that this is important to consider, but it is also dependent on where you are in the journey to FI. I have almost a 100% stock allocation with primarily index funds. When I reach FI, I plan to go to some bonds, but in the interim to supercharge my goals I am ok with doing a bunch more risk. In 10 years time (once the secular bull market is over) then I will probably increase to at least 80/20 or 70/30. However, your question is something everyone should look upon as they move in the stages to FI.

  26. You both have done very well. 2.5m in assets in 2016-2017.
    I am 10 years older than you and single with 2m in assets (50% in cash)
    Just started investing – used to do Fx before for 20 years.
    1. Since I am not working due to being in my 50s…I will have to rely on investments for the next 30 years.
    I was thinking of $200k in investing. 10% in crypto and 90% in individual stocks – we know that these highs will need a good 30-40% correction this year Q4 or 2018 Q1 for sure.
    Keep cash for the crash correction and invest then. Keep the home and land around 600k and I am curious with not working for over a year now and no divis coming in what the best way forward is. I would love that crypto winfall 🙂

  27. It’s an interesting topic. One that I’ve been pondering a lot lately. “Funny” how topics like this seem to reinforce themselves. 🙂

    I’m 100% stocks right now. And early-retired three years ago (47 now). Every Monte Carlo analysis that I’ve done lately shows that my chances of money lasting to age 100 is between 85-90% right now. BUT… if I move to a 60/40 stock/bond mix, the “odds” go to 99%!

    I’ve struggled with this but realized it the “sequence of returns” risk. Sure, stocks perform better CAGR over time, but drawdowns during the bad years can really mess things up.

    I met with a close friend who happens to be a CFP the other day and we spent hours talking through this and looking at numbers.

    End result is that I’m going to shift into a more conservative portfolio.

    At the finish of the talk he said risk comes down to: Do you need to take it? (Some people do to meet their goals, I don’t) Can you take it (I can, we have a high risk tolerance) Do you want to take it (this got me – if don’t NEED to take the risk, so why bother??)

    • Thanks for sharing. I think it would be a good idea for you to lower the risk a bit. Great input from your CFP friend. If you’ve already won the game, why keep playing? I think having less gains for a few years is a small price to pay.

  28. Vanguard says I should be at 80/20/0 on stocks/bonds/cash, but my actual breakdown is something like 45/10/45. Maybe it’s because my answers to their questions hinge on my current asset allocation– like I don’t plan on selling investments until RMDs start in >15 years, but I do plan to retire sans pension long before then, and I expect to spend down this cash until RMDs start.

    As for buying a crash, remember the trajectory can be V, U, or L. The last one was V but they’re not all so quick to recover! And just because we’ve not seen an L in this country doesn’t mean it can’t happen.

    On blood in the street, this is always happening somewhere in the world. Like right now if you look at energy, shipping, and retail, and have a way to gauge survival likelihood, I think there’s potential for more upside here on a (presumed) recovery than in the market at large. This is another reason I keep a low stock allocation– what I have skews toward higher risk.

    I hear you on employer stock, right now I never turn down free shares or options, but I’m also maxed out on my ESOP because my price anchor is very favorable at the moment. Once it resets, I’ll scale it back.

    • Thanks for your input. I don’t know how to deal with the L trajectory. I need to do more research on that. Keep investing would probably still work out in the long run.

  29. I’m too risk averse. We have too much sitting in cash right now–over 100k when you put all our accounts together. I know the bubble is going to pop but I don’t know when. That makes it hard for me to funnel money into stocks even though we probably should. In November when our cash flow becomes positive again I’ve sworn to myself I’ll put more in the market.

  30. On individual stocks vs an index..I see them interchangeably.. I build my portfolio from scratch in order to reach a certain goal of mine. Why did you purchase those individual stocks in the first place?

    For most dividend ETF’s out there, the top 10 – 15 holdings usually account for something like 50% of the portfolio weight easily. So these ETFs are far less diversified than what everyone else is telling you. The expense ratios serve as a permanent tax on your dividend income forever and ever. There is also the issue of forced turnover within the index..

    A good diversified portfolio with at least 30 companies will do similarly to an index fund like S&P 500 or Dow Jones 30.. If you are patient, you can do well.

    I do not believe that owning 30 stocks directly is riskier than owning an index that includes these stocks…

    • Thanks for your input. I haven’t done well with individual stocks lately. It will be easier to go with index until I can devote the time to individual stocks. Life has been too busy.

  31. Interesting replies! I’m always on the fence about it. You have to ask yourself, if you can sleep at night w/your allocation. If not, make some changes, but not too much. Any stock market correction, I just ride it out.
    I like Vanguard too for choosing my allocation. At my ripe age, I’m ok w/60/40% stocks to bonds. There are old folk out there w/80% in stocks for long term though. Money managers as well. Others will tell you, be prepared to lose some $ if you gamble that high.
    I think you have to have a couple of years, maybe a few, in liquid cash reserves for living expenses+ emergencies, if you want to play the markets, to be safe.
    I’m ok w/where I am. But always wishing I could take a bit more risk. That must be the greedy primitive cave man in me!

  32. Hi Joe, I’m fairly confident in my Vanguard funds as well, and the stock market as a whole. My risk tolerance is very high (perceived only). I have no idea how I would fair with a big drop. I had money in the market in 2008 but it was peas. So I was more excited than anything else, to put new money into the market. But the brief 19% or so drop in 2011 didn’t phase me; which tells me I’m at least moderately risk averse. I think the biggest factor being that our household’s dual income is decent. I’m sure I would feel differently if either of us got laid off.

    • That’s great. You gained experience at a bargain price. Older investor lost a lot more money during the financial crisis. Nice job.

  33. No recent changes in risk tolerance here. We’re somewhere between the early and late stages, probably shifting closer to late. But.. I still have a stable job and multiple contingencies in place. So even though we have alot More financially to use I also feel that the risks are relatively well mitigated.

  34. I am staying 100% stocks until FI or retirement nears. Then when I Have my reserves of money, I will become much more conservative- likely 30-50% bonds depending on my age (37 currently). As for a market crash, I know buying things will be cheap, but I really don’t want to see property values tank, unemployment increase, and people to suffer….I hope we continue riding this bull for a few more years.

    • Interesting take. Wouldn’t it be a gradual shift? I don’t see going from 100% to 70/30 so quickly.
      I don’t to see a crash either, but it’s inevitable. I just hope it happens sooner rather than later. The longer the bull market, the more painful it will be. IMO.

  35. Our allocation is close to yours, although it has been a while since I checked it… We’re planning to reassess it soon.

    Things get crazy when the markets crash. Having experienced one is huge, and I like to think we’ll behave better this time around. I also think having broad index funds helps because I can stay out of the loop and not worry about my picks.

    • You learn so much by going through a crash. It’s easy to plan, but it’s hard to stick to it. I think broad index fund is the key also. Index funds will recover with time.

  36. During the Great Recession I’d considered selling my Miata just to invest more. When the market is down about 50% I figure any extra cash should be “shoved” in!

    I am about 100% stocks and have an extremely high risk tolerance but sometimes get concerned about individual investments (though never the market overall). I get excited by any larges moves, up or down. I think the key questions are “What do I want this money to do for me?” and “How much fluctuation can I stomach?”, independent of the current market level. If you’re adding, and have years before withdrawing, the higher your RT the better -IF- you can stomach those drops. When you’re withdrawing, it’s a different story as a smoother ride (with bonds, etc) will often increase your overall rate of return. But you absolutely can’t make a knee jerk reaction when it hits the fan, or else you’ll likely destroy all you hard-earned gains!

    Don’t feel bad if you’re 100% invested during the next crash. You can’t predict what will happen next week, month, or year. “Pulling some money out when it’s high so I can put it in when it’s low” simply doesn’t work. Just keep your allocation through highs and lows and you’ll do great!

    ps: Reading “Our net worth dropped 25% in 10 months, but we kept shoving every extra dollar we had into the stock market.” made me want to high five and yell “Yes. Yes!” That’s when the big gains are made!

    • I used to be able to stomach the volatility too. I had a good job and could leave the investment alone. It’s a different story now.
      Bull markets make you feel good, bear markets make you rich. 🙂

  37. Mine may be high because I’m still many many years from retirement. Also since the market is doing well, it seems psychologically ok to take on more risk. Now when a downturn takes place is when the real test comes – i.e. – buying when there’s blood in the streets.

  38. Ahh, this is a toughie. On one hand, you might have too high of a risk tolerance, but what if you have a really low risk tolerance? I guess there’s investing options for both types of people, but I’d argue that either end of the spectrum can be dangerous.

    • Having low risk tolerance is not great, but you should find out before the stock market crashes. It’d be disastrous to panic sell at the wrong time.
      Low return is better than losing money.

  39. We haven’t invested through a major correction, just rode on the coat tails of one. The next one will be our biggest test as we already have enough invested to see 20-30-40K drop off our net worth when there is a correction. We will invest through it and I am confident in our ability to stomach the loss – but I won’t like it 🙂

    • You’re right about not liking it. That’s how I felt with the dot com bubble.
      The financial crisis was different, though. I felt good because I knew it was a great opportunity. Didn’t lose any sleep at all.

  40. I am sitting in Vanguard Target date funds so I like Vanguard manage my risk tolerance…for now. In the next few years I will either start managing the balance myself or switch us up into later date funds to get more aggressive funds balances.

    As far as a coming crash, we are welcoming it. I didn’t get to take advantage of the 2008 crash so it would be nice to have a crash earlier in our funds life than later.

  41. You raise many great points here. Currently my portfolio has only about 8% bonds. Since I’m not retired, I think I can wheather any storm and prefer the higher expected growth. I’m curious, can you explain why you would wait until 2018 to change to a 70/30 portfolio if you have decided that it is the proper asset allocation for you today?

  42. I’m at 100% stocks. And planning to be at 100% indefinitely—albeit I’m not a conventional investor in that I’m not going to cash out any of my stock investments—ever. My plan is to just keep plowing money into it and leave them there, let them grow to the day I die.

    So, yeah, I am a long, long, long-term investor.

    • Just did a rough estimate:

      Investing $1 million base amount today, assuming a moderate inflation-adjusted annual growth rate of 4.5%, I would have $543 million in 300 years!

      Sure, I will be long gone and dead, but still, it is nice and comforting to know I will have that much money in 2317!

  43. Mrs. C. and I had kids young and had several years with a very low net worth, low income jobs, and kids to take care of. That experience I think actually increased our risk tolerance now. We know we are able to live off a lower income and be okay. For investing purposes we are about 95% stocks and reits, and have a very small exposure to bonds through a target retirement date fund in my 401K. I balance this risk by paying extra on our mortgage, which is an extremely conservative form of investing. I am planning on staying at this allocation through the next market crash and investing more and more money. For me personally I would like the crash to happen in 2020 or later, because I will have a ton of cash flow freed up to invest more as my house should be paid off then.

    • That’s a great fall back position. I like your plan. You just have to stick with it. Interesting take with 2020. I’d prefer the crash to be this year, but it doesn’t look like it’s going to happen. 🙂

  44. As a young guy – I’m currently all in stocks, albeit some 10% international. I have faith in the market like you do, with some time to recover if it does crash.

    I will check out that Vanguard quiz – thanks for passing that along!

  45. I am definitely on the “riskier side” of the spectrum with much of our investments in stocks. I entered the workforce post college in 2012, so I have only known the bull… which definitely plays into this. Both my husband and I work and we plan to continue to invest during a market downturn, but that does somewhat depend on our job situation (layoffs?). Thanks for the reminder to check in and reassess risk tolerance!

  46. I think you know yourself and already know the answer. Since you are retired, have a high net worth, and are getting nervous, you should cut back on stocks. However you don’t want to remove them completely or else you will be a victim to inflation.

    • Right. Cutting back a bit is okay. The allocation shouldn’t change a huge amount. That’s trying to time the market. I think 10% change is okay.

  47. While I don’t hope for a market crash due to how ugly it gets with job losses we’re prepared to weather the storm. Since we’re about two years from retiring, we shifted our allocation target to 75% stocks/25% bonds. The stock fund allocation includes 7% in REITs.
    That makes me sleep well at night and confident enough to retire no matter what the market does two years from now.
    With a 50% drop in the market we only “lose” 25% of our net worth. I can stomach that.
    So our stock allocation is 50% of our net worth.
    We don’t bother with individual stocks. Just don’t want to invest the extra time in picking stocks. A high- yield dividend growth fund does the trick for us.

    • I don’t want a market crash either, but it’s going to happen sooner or later. I prefer sooner at this point in my life. It’d be much harder to deal with if the market crash right after Mrs. RB40 retires.
      I like your investing strategy. Thanks for sharing.

  48. I tend to prefer the lower risk investments in general, whereas my husband is very okay with higher risk. But, we are in our 20’s and I am fully aware this is the time to invest in the higher risk. My husband has a great job and we are able to depend on that no matter what the market does. When we get to FI, that will change. So I think we have a higher risk tolerance just based on that. I do think that in a few years, as we get older and our financial situation changes, my opinion on how much risk is okay will definitely shift.

    • Mrs. RB40 has lower risk tolerance too. She doesn’t pay that much attention to our investment so that’s good for now.
      I can do whatever I want. 🙂 You’re doing the right thing to go with higher risk now. It will give you a lot of experience.

  49. Even though, we’re in our late twenties. We have always bear on the side of caution (less risk), but, I think it’s time we take on a little bit more as our income increase with our working years.

    But, I can understand your uneasiness, having a family that depends on you and being in a possible precarious situation causes distress. Like others has mentioned above, you should reevaluate your current risk management.

    Good Luck!

    • In your situation, I’d go 100% stocks. If your income is stable, you can ride out the volatility without losing sleep.

  50. I was just reading about net worth allocation. 70/30 in your 40’s without a job sounds a little high to me. We try to stay in a 50/50 to 60/40 range excluding real estste.

    We are at a 4% cash, 20% Bonds, 25% Stocks, 33.5% Real Estate Equity, and 17.5% Rental Equity.

    Proper allocation based on age, risk, and horizon are the most important.

    We have a pension and Mrs. Al owns her own business. If market were to drop 30% to 40% tomorrow or in the near future, we would be fine. Since the pension is stable, the rental income, and eventually social security is COLA adjusted.

    Our biggest concern is the net worth % of the home and rental equity. Although we look at the rental as a business and we just raised the rent $100.

    The fact that you are not able to sleep is a good indication that you are not comfortable with the Market and allocation so consider taking some profits and put them in a safe place.

    If in your situation, I would consider converting a portion of those monies into an income annuity to reduce your risk as part of an income plan. Another part can be dividends, blog business, and maybe some high yield individual muni or corporate bonds.

    A word of caution, greed and fear sells. People act on both emotions. Also one who predicts a negative outcome will someday will be right. People are their own biggest obstacle. Dont be.

    Getting ready to take on three months worth of trips. No one knows for certain what the Market is going to do so it is clearly out of your control or mine.

    An income plan is in your control and can help you take some monies of the table and sleep better at night.

    Best of luck and wishes to you and your family.

  51. I am not sure exactly how I will be affected by a stock market crash. I believe that the financial advisor who handles my Retirement Account has me in about 70 percent dividend stocks and 30 percent in cash related investments. But I have a separate Prosperity Account that has about $500,000 in it and it is all in cash. So I should be okay with a stock market crash — provided there is no currency collapse!

    I still like this quotation regarding stock market crashes:

    “My family wasn’t affected by the crash of ‘29. They went broke in ‘28.”
    — Gerald Barzan

  52. I’m very risk-averse now that I have a son. Both my wife and I don’t work, so we don’t have luxury of depending on each other just in case something wrong happens.

    Do you think this is why even though you show you have a $2.5 million net worth, you feel your wife still needs to work at a job that pays just OK?

    I’m thinking that if I lived in a cheaper place like Portland, $2.5 million would be enough. If it is not enough, what is your target NW number?


      • Having a family has also lowered my risk tolerance too. I’ve been risk-adverse all my life whether it is investing, dating, making money, or choosing friends. I want to have plan B, C, etc. for almost everything I do when it’s possible to even do so. I think part of me is really scared of the unknown in the future although it could turn out to be great.

        Now that I have a son, my risk tolerance is reaching null. I have to think about what might happen to him if something goes wrong. My husband is a grown man and can handle a tough time. But I don’t think my toddler can.

        • Ms. Frugal-I wish I had been more risk adverse about choosing friends! Too much wasted time-but I did learn a few hard lessons from it.I’ll have to teach that one to my kid. Dating too. Great answer. Thanx. Oh, and believe in yourself, have faith in the future!

          • Thank you, Penny! Sometimes I do wish I had been more adventurous so that I could see what else life has to offer. I’m glad you can see the positive in what happened. We cannot undo the past. We can only learn from it. I totally agree with you! 🙂

    • I’m ready for Mrs. RB40 to retire, but she’s more conservative than I am. She isn’t ready to quit her job yet. Hopefully, she’ll get there by 2020. Our son isn’t expensive right now. That will change when he gets to college, but that’s a long way off.

  53. We’re about 75% equities, and 25% in cash/preferred shares. That’s roughly 8 years of spending without needing a penny in market returns. Yes, I sleep pretty well at night knowing it.

    It makes sense that as you’ve become dependent on your investments for income you become risk averse. One might even say that’s very sensible of you Joe!


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