Good Time To Check Your Risk Tolerance Again?

I should really stop looking at and, but nobody will stop talking about it so here I am talking about it too. Moo. πŸ™‚ If you watch your portfolio closely and are feeling nervous and/or scared, then perhaps this is a good time to self-reflect and ask yourself if you are as risk tolerant as you thought you were.

Many financial experts like to give out a simple “risk questionnaire” to figure out your risk tolerance, and then guide you into an asset allocation afterwards. The problem is, it is really easy for people to say “I’m not scared!” and then tell themselves they don’t need to save as much. The more you save, the less risk you need to take. Back when stocks were booming, so many folks had 100% in stocks, and even some retirees had 60-70% in stocks.

Back in 2006, I tried out a bunch of these risk surveys and remarked that

I think it’s really hard for people to gauge how they would react to losing 30% of their assets in a year unless they had actually experienced it.

I still don’t think we have experienced true fear yet, but maybe now is a better time to take the survey questions again? These samples are taken from the ShareBuilder website’s PortfolioBuilder application.

Sample Question 1

Well, the year-to-date total return of the S&P 500 is only about -12% as of the end of today. It was about -15% yesterday.

Sample Question 2

The recent bouncing around puts this question in a new light, eh?

Sample Question 3

Even now, we are nowhere near dropping 25% in 3 months. Are you sure what you would do?


  1. Moo? Do you mean “Baa?”

  2. I just checked the return on FUSVX (Fidelity’s ultra low cost S&P index fund) , and it looks like before today, the results were at -23.42%, so pretty close to a 25% drop on the year for the S&P 500. The year year drop is -25.98%.

    So, it hasn’t happened over a period of days or weeks, but it has happened over the last 9 months to a year.

    Last night after the collapse is about as close to a panic in the financial markets as we have seen since 9/11, so it’s probably a pretty good indicator for most people how they respond to risk. I figure that I’m still 26 and have plenty of time to let the markets pick back up (like 40+ years) so it is just a buying opportunity for me, but I think that it would rattle me a little bit if I was 60 or 70 with this happening.

  3. Hehe, I also had to giggle at the Moo. Maybe your sheep aren’t such followers if they don’t even say bah!

    This is a really good thing to point out. Most people do great with “high risk stocks”, as long it is one of those years where the market does well.

  4. I, too, look at this recent development as a great time to buy. I don’t need the money for 20+ years. The market will recover, or it won’t really matter what I did with my USD anyway.

  5. I have to agree that now is a great time to re-evaluate risk tolerance. It seems that when things go down people forget that it is still possible to make money.

  6. I think people have risk tolerance wrong. They invest in one product, like a bond, stock or mutual fund, and then switch later in life. I think “when” to invest is a better question to ask then “what” to invest in. I like to focus on using factors like a volatility indicator, such as the VIX, to judge when to stay in the market and when to get out. When volatility is high, markets are correcting. Use this indicator as a gauge to get in and get out of the markets before dangerous market conditions occur.

    Staying out of the markets when you need to will keep your returns healthy and help you achieve your investment goal. Remember, you don’t need to be in the market 100% of the time to be “in it for the long term.”

  7. I really love yd’s perspective.

    When I started investing, I thought I was lacking in risk tolerance, and I picked a stocks/bonds allocation of around 60%40%. Admittedly, at the time we were riding on the highs of the tech boom and I was very distrustful of that (watching total crap companies skyrocket on their IPOs).

    I have come to realize that I am not so risk averse as I thought. I’m still about 70%/30% but I’ve been increasing my equity exposure over time. The market tanks, but I keep making my regular investments. I toss in a few irregular ones on particularly bloody days.

    I do realize that this may be our version of the famously stagnant Japanese stock market and my investments could flag for years. I’m not sure what that would feel like, but I intend to remain undeterred in my approach.

    Perhaps this won’t be so hard, but I sort of suspect that it actually will be hard. If there is anything I am certain about the stock market, it is that it continuously redefines the truths that “everyone knows.” One of those truths is that ‘you always make money over 10 year holding periods.’ There are lots of other truths that we use to reassure ourselves, and I wouldn’t be surprised if some of them quit being true.

  8. BTW, does anyone else walk around humming that R.E.M song? You know, “It’s the end of the world as we know it; I feel fine.”

  9. How about a post on getting started with MFs, stocks … essentially getting started with building a portfolio. Who do you call? How do you trade? etc.

  10. I was born in 1962, which means I was 25-years-old in October 1987, when I watched the value of my investments drop 30% in less than a week (over 20% in one day).

    Yeah, it worried me a little, but I’ve always been a responsible type with money, so what was invested wasn’t something I was going to need for many, many years, so I only worried a little.

    It’s been a while since then, and I’m much closer to needing that money now, but let me tell you the secret to keeping from worrying too much about this sort of thing – don’t panic when you are in your 20s and 30s and do something stupid with your investments, and keep saving and investing, so even if you have big drops, your balances are still high enough to not have you that worried.

  11. AYouthInTheWilderness says:

    Good comments from Yd and Lee. VIX is definitely a valuable indicator.
    I moved to 100% cash last august and have been waiting oh-so patiently for this week. It’s been an exciting time.
    Then again, like others here I have less to lose and a long time to go. Not sure how I would feel about doing the same thing with hundreds of thousands.
    And yes, that song has been too perfect because I do feel fine. =)

  12. Clog Money says:

    I would buy more in those companies which the government would deem too fundamentally important to the economy to see go under. Although what companies that applies to at the moment is a little bit of a risk in itself!

  13. I just wish my check would clear faster so I could make some more purchases…

  14. @ Clog – remember that just because the company is “too fundamentally important…to…go under” doesn’t mean your investment won’t go under…

  15. Jonathan, what are you buying now in hopes of riding the wave back up? Index funds?

  16. Jeff Davis says:

    Buy more!

    But isn’t that basic investing? Buy low, sell high? When everything goes down, you buy, not sell.

  17. If you believe in the market (and you should if you had money there in the first place) then you don’t worry about it coming back. If you are close retirement or a time when you need the money then you should have moved the money to less risky investments. If you did that, then you shouldn’t be too considered either. I am invested near 100% in stocks (mutual funds). I have ~30 years til I need it. Yes I have taken a -25% hit on those investments this year. Yeah its not fun to watch but I don’t get concerned just look to keep buying.

  18. yeah, i’m SO ready to buy all these cheap stocks and funds right now! i’d say i’m as risky as it gets (if given the opportunity), but unfort. the money supply just isn’t there for me to dabble more in.

    So for now? Time to pump up the 401k% as much as i can afford!

  19. I saw an interview with the CEO of Vanguard and he mentioned that young people should still be aggressive with their retirement funds since retirement is decades off. That being said the portfolios he started for his grand kids are in balanced (60/40 or so) funds.

  20. Although I think it’s probably a good time to buy in a broad fund (too hard to pick individual companies), I’m just sticking with my regular investment plan. Laziness wins all the way.

  21. buy_and_hold says:

    Is keeping 2x S&P Inverse (Like Rydex Inverse RYTPX) as a small percentage of portfolio a good strategy when there is a lot of bad news in the market. For example Jan was when the global sell off began and instead of selling an asset class if one has allocated 3% of new assets in inverse fund, it would have provided a good down side protection along side regular investments on long positions. A 4% on 2X Inverse gives 20% buffer on the down side correction. (I know talking this now is a hindsight investing)

    What do you think about FDIC insured Foreign Currency Accounts (like Everbank) for parking cash to protect from dollar downside or a failed T-Bill auction in future.

  22. Hi,

    Does anyone have a way to buy Vanguard funds faster for IRAs? I tried to buy on the lowest day on their website using the fastest method (bank transfer), but the funds still didn’t process for 3 days and I paid the price at closing on the day of the transfer.

    I think it’s pretty bad that you can’t get closing day prices. You could accidentally buy on a high day.

  23. buy_and_hold says:

    The only way you can get the closing prices is to keep reserve in your Vanguard Money Market fund. If you want to buy on down days you need to keep reserve in the Money Market fund and exchange it before 1PM EDT to buy at the closing price for that day.

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