Tag Archives: risk tolerance


The Challenge: How To Benchmark Your Investment Portfolio

One of the biggest challenges you face as an investor is determining how well you’re performing. Sure it might be nice to see your portfolio is “up 12%,” for example, but how do you know you couldn’t have done better? The primary solution to this problem is to create or find a benchmark against which you can evaluate your portfolio’s performance. In theory the benchmark you choose should be appropriate for all your investment managers.  Unfortunately it’s almost impossible to develop one benchmark for all investors. Benchmarks are relatively straightforward when you want to measure the relative performance of a money manager who only invests in one asset class like US stocks or bonds. It gets far trickier when you […]

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 […]