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Is Your Risk Tolerance Too High?


Is Your Risk Tolerance Too High?Is your risk tolerance too high? This is a very important question for anyone investing in the stock market. Risk tolerance tells you how much market volatility you can stand before the stress affects your life. Some investors can handle a 30% drop in their net worth without losing sleep. However, many investors will panic sell and lose money when the stock market crash.

Recently, I’ve been questioning my risk tolerance level. I haven’t looked at my risk tolerance in a couple of years and things change. I’m a bit older and I might not be able to stomach another big drop in our portfolio. The stock market has been on an extended run for many years now so a crash probably will come sooner rather than later. For me, that means in the next few years rather than in a decade. Life changes so we need to make sure to update our investment style accordingly.

I’m happy with our asset allocation, but I might need to be a bit more conservative at this point. Let’s review my investment history through previous crashes and see how life changed since 1996. After that, we’ll see if our asset allocation matches my risk tolerance.

The Dot Com Bubble

I started investing in my 401k in 1996, right after I started my engineering career. It took me a few years to max out my 401k contribution and then started investing in a taxable account. The dot com bubble was in full swing by then and 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 when the dot com bubble popped.

The drop in value was very scary because I’ve been investing only for a few years. The big mistake I made was to invest my 401k in my employer’s stock. As you can see from the chart below, the stock dropped quite a bit in 2000 and went side way ever since.

employer 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 401k, but didn’t really add much to my taxable account. We put extra money toward our mortgage instead of investing in the stock market. I married Mrs. RB40 in 1999 and we purchased a house soon after.

The 2 most important lessons I learned during the dot com crash were.

  1. Don’t invest in employer’s stock. My employer already gave me stock options, stock grants, stock discount plan, a job, health insurance, and other benefits. It was a huge mistake to put my 401k in the same stock. That’s too much concentration.
  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 more instead of paying extra on the mortgage.

The Global Financial Crisis

The global financial crisis was a huge crash, 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 easily weather the downturn. 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.

net worth history

Our finance wasn’t perfect, though. The big mistake was purchasing our condo at the height of the housing bubble. The value of our condo is just getting back to that level after 10 years. 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 is working out well. We should make a nifty profit when we sell those properties.

Important lesson learned

  1. Buy when there’s blood is in the street. The financial crisis crash was bad, but my experience from the dot com crash told me to keep investing. Buying properties after the housing crash was a good move too. This strategy worked and our net worth increased dramatically over the last 10 years.
  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, though. The investment portfolio wouldn’t have dropped as much and we’d be able to buy more stocks during the downturn.

The Next Crash…

Our situation changed quite a bit since 2007. I don’t have a steady income I could depend on since I retired from engineering 5 years ago. My online income is good, but I’m positive it will crater when the next market crisis strikes. Mrs. RB40 still has a solid paycheck so we could depend on that. However, she plans to retire by 2020. That’s why I’m hoping the market crashes soon. We’d be able to weather the storm much better while Mrs. RB40 has a steady income.

Now that I’m older and a bit more conservative, my risk tolerance is a little lower. Our asset allocation is now 70% equity, 10% alternatives, and 20% bond/cash (not including our investment properties.) I still have faith in the stock market, but I want to have some dry powder for the next crash. Our portfolio would drop, but we could convert some bond to stock and benefit from the recovery.

Preparing for the next storm

That might not be enough, though. I’m getting more nervous as the market marches higher every month. That tells me that my risk tolerance is probably too high. What can I do to help me sleep better?

  1. Reassess my risk tolerance. I went through Vanguard’s investor questionnaire and they recommend 70% stocks and 30% bonds. It’s probably a good idea to increase our bond & cash allocation to 30% because I’m getting more nervous about the stock market. I’ll make this one of my financial goal next year.
  2. Cut back on individual stocks. I still have complete faith in the stock market and the Vanguard index funds. The US stock market always recovers after a crash and I don’t see why the next one would be different. However, I don’t have the same confidence with individual stocks. Some companies won’t be able to come back. The world is changing and even solid companies could go bankrupt or just stagnate. I think it’s a good idea to sell some individual stocks in our dividend portfolio and put the money in a good dividend growth fund.

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 investing strategy are derived from risk tolerance so it is important 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 43, I don’t want to stumble too hard.
  • Income stability – Our income isn’t stable anymore. Currently, we can support our lifestyle without drawing down our investment portfolio, but that may 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 better. This gives me the confidence to avoid panic selling. We’ll only sell if we need the money.
  • Investing horizon – We probably need to sell some investment to help fund our kid’s college education, but he is only six years old. There is plenty of time to recover from market volatility. Once our kid is in high school, then we’d need to be more conservative with that investment.

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 is crashing? You won’t know how you’ll react unless you’ve been through a few bear markets.

Lastly, risk tolerance really shouldn’t change much from year to year unless there is a big life event. Retirement, for example, can lower your risk tolerance because of the need to draw down. It’s a red flag if your risk tolerance changes a lot from year to year.

If you have a few minutes, try Vanguard’s investor questionnaire  and see what they recommend. Does Vanguard’s recommendation match your asset allocation?

When was the last time you took a careful look at your risk tolerance? Can you keep investing through a 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 helpful and I log on almost everyday. Check them out if you don’t have an account yet.

Disclosure: We may receive a referral fee if you sign up with a service through the link above.

Image credit: Kelly Leeves

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 73 comments… add one }
  • Mr. Tako August 28, 2017, 12:32 am

    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!

    • retirebyforty August 28, 2017, 8:11 am

      That’s great! It looks like you’ll sleep very well through the next crash.

  • Sam @ Financial Samurai August 28, 2017, 1:07 am

    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?


    • Chris @ Duke of Dollars August 28, 2017, 4:56 am

      Having a family will definitely change my risk tolerance also – you’re not alone 🙂

      • Ms. Frugal Asian Finance August 28, 2017, 6:17 am

        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.

        • Pennypincher August 28, 2017, 8:18 am

          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!

          • Ms. Frugal Asian Finance August 28, 2017, 10:13 am

            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! 🙂

    • retirebyforty August 28, 2017, 8:15 am

      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.

      • Sam @ Financial Samurai August 30, 2017, 11:19 am

        Maybe another way to think about it. A $2.5M net worth is equivalent to around $5M in San Francisco. It’s a lot of money Joe!

        What you gonna do with all your free time now that junior is back in school?

  • Ernie Zelinski August 28, 2017, 1:14 am

    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

    • retirebyforty August 28, 2017, 8:15 am

      Ahh.. Your Prosperity account is a huge buffer. You should be fine for many years. Great!
      I like that quote. 🙂

  • Al August 28, 2017, 1:30 am

    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.

  • Belle August 28, 2017, 2:41 am

    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!

    • retirebyforty August 28, 2017, 8:18 am

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

  • Ember @ An Intentional Lifestyle August 28, 2017, 3:24 am

    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.

    • retirebyforty August 28, 2017, 8:20 am

      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.

  • Mr. Enchumbao August 28, 2017, 3:41 am

    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.

    • retirebyforty August 28, 2017, 8:22 am

      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.

      • Pennypincher August 28, 2017, 8:29 am

        The market crashed and we lost our jobs, just as the kid was starting college! -survivor.

      • Joe August 29, 2017, 12:21 am

        The market crashed right after I early retired. Lost 3.5 million in less than a year. As much as you think you can tolerate risk, you don’t really know until a crash.

        • retirebyforty August 29, 2017, 8:42 am

          Oh wow, that’s a big drop. What did you do? Did you hold on and recovered?

  • Jeff @ Maximum Cents August 28, 2017, 4:05 am

    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.

    • retirebyforty August 28, 2017, 8:22 am

      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.

  • Mrs. Adventure Rich August 28, 2017, 4:21 am

    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!

    • retirebyforty August 28, 2017, 8:23 am

      The next crash is going to be tough for you. Just hold on and don’t panic sell. You’ll learn a ton. Good luck!

  • Chris @ Duke of Dollars August 28, 2017, 4:58 am

    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!

    • retirebyforty August 28, 2017, 8:24 am

      100% stock is good for a young person. You don’t have that much to lose anyway. 🙂 Good luck!

  • John C @ Action E August 28, 2017, 5:23 am

    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.

    • retirebyforty August 28, 2017, 8:27 am

      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. 🙂

  • Jonathan August 28, 2017, 5:23 am

    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.

    • Jonathan August 28, 2017, 7:57 am

      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!

    • retirebyforty August 28, 2017, 8:28 am

      That’s a great plan. Are you planning to leave the stock for your progeny?

  • [email protected] August 28, 2017, 5:35 am

    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?

    • retirebyforty August 28, 2017, 8:29 am

      It takes a long time for me to change allocation. I’ll start now, but probably won’t finish until next year.

  • Budget on a Stick August 28, 2017, 5:48 am

    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.

    • Pennypincher August 28, 2017, 8:26 am

      Market crash? Time to buy! : )

    • retirebyforty August 28, 2017, 8:30 am

      That’s great. That’s the easiest way to do it. Just keep investing when the stock market drops.

  • Apathy Ends August 28, 2017, 6:04 am

    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 🙂

    • retirebyforty August 28, 2017, 8:32 am

      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.

  • Mrs. Picky Pincher August 28, 2017, 6:30 am

    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.

    • retirebyforty August 28, 2017, 8:34 am

      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.

  • SMM August 28, 2017, 6:41 am

    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.

  • Ron Cameron August 28, 2017, 6:59 am

    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!

    • retirebyforty August 28, 2017, 12:59 pm

      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. 🙂

  • Mr Crazy Kicks August 28, 2017, 7:01 am

    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.

    • retirebyforty August 28, 2017, 1:00 pm

      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.

  • Dads Dollars Debts August 28, 2017, 7:32 am

    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.

    • retirebyforty August 28, 2017, 1:02 pm

      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.

  • FullTimeFinance August 28, 2017, 7:42 am

    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.

  • Tim Kim @ TubofCash.com August 28, 2017, 8:03 am

    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.

    • retirebyforty August 28, 2017, 1:03 pm

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

  • Pennypincher August 28, 2017, 8:13 am

    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!

    • retirebyforty August 28, 2017, 1:05 pm

      3 years of expense in cash seems like so much to me at this point. I’m sure we’ll work up to it as we get older.

  • Dividend Growth Investor August 28, 2017, 8:20 am

    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…

    • retirebyforty August 29, 2017, 8:35 am

      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.

  • Nicoleandmaggie August 28, 2017, 9:38 am

    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.

    • retirebyforty August 29, 2017, 8:36 am

      $100k in cash is great. We should build to a similar level before Mrs. RB40 quits her job. Maybe $75k.

  • freebird August 28, 2017, 9:40 am

    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.

    • retirebyforty August 29, 2017, 8:39 am

      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.

  • Brad - MaximizeYourMoney.com August 28, 2017, 12:06 pm

    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??)

    • retirebyforty August 29, 2017, 8:40 am

      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.

  • Mattej August 28, 2017, 4:10 pm

    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 🙂

  • Jason August 28, 2017, 5:19 pm

    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.

  • Done by Forty August 28, 2017, 10:42 pm

    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.

  • Jack the Investor August 29, 2017, 7:41 am

    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!

    • retirebyforty August 30, 2017, 8:53 am

      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.

  • Your First Million August 29, 2017, 2:30 pm

    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!

  • Patricia Sanders August 30, 2017, 3:38 am

    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.

  • Derek @ MoneyAhoy August 30, 2017, 6:19 am


    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.

  • Adam and Jane August 30, 2017, 7:25 am


    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.


    • retirebyforty August 30, 2017, 9:35 am

      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.

  • Bernz JP August 30, 2017, 9:07 am

    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.

  • Steve Poling August 30, 2017, 2:55 pm

    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?

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