Tag Archives: risk tolerance

Attempting to Maximize Your Return Isn’t Always a Good Thing

I am often asked “why shouldn’t I always choose the highest risk portfolio if it’s expected to generate the highest return?” That seems like a very reasonable question. In fact if everyone were rational they should choose the highest risk portfolio for exactly this reason. Unfortunately, very few people are rational. Chasing Returns Will Hurt You As our chief investment officer Burt Malkiel pointed out in Investors’ Most Serious Mistake, individual investors tend to chase returns. In other words they invest after markets have risen and sell when they decline. The chart below illustrates this behavior.                 As you can see cash flows into mutual funds when markets are up and are withdrawn […]

Couples Investing: How To Determine Risk Tolerance

A couple of weeks ago we wrote a post that discussed the importance of talking to your partner about money. Perhaps the single most difficult issue for couples to resolve is how much risk they should take with their investments. Managing your accounts separately is not a good solution. Whether accounts are titled separately or jointly, they are considered marital assets. Even 401(k)s, which almost all married couples manage separately, are marital assets. I don’t suggest you invest as if you expect to get divorced, but a healthy relationship depends on working jointly toward your financial goals. The conventional wisdom is you can best determine your joint risk tolerance through the pursuit of a consensus. If the two of you […]

Why Risk Tolerance Matters

Every year, a top-notch research firm called DALBAR releases a study that shows that the average mutual fund investor underperforms the market, often by a lot. Last year, the difference between the average mutual fund investor and the market was nearly 8 percentage points.[1] Why the difference? People are making the classic investing mistake of allowing their emotions to dictate when they buy and sell. When they open their portfolio statements to see that stocks are growing, they happily dump more money into stocks. When the market gets choppy or drops, they worry, and end up shifting money into other asset classes – like bonds or cash. “Investors succumbed to their fears (in 2011),” DALBAR reported, explaining why the markets […]

Are You Being Honest About Your Risk Tolerance?

Impact of compounding on retirement savings.

In the hit TV show House, lead character Dr. Gregory House is infamous for saying never ask patients how they are feeling because they always lie. Better to just judge their symptoms. Unfortunately the same can be said for investors’ tolerance for risk. In order to recommend an ideal asset allocation for our clients, we ask a series of questions to determine their investment goals and risk tolerance. The vast majority responds that they want moderate risk and moderate returns. However, almost every client ignores our recommendations when presented with moderate risk managers (only 80% of the S&P 500’s risk) because the amount by which they outperformed the market (2% per year over a long period of time) doesn’t seem […]