In a discussion about risk on the Bogleheads forum, member John Norstad brought up an intriguing question. Let’s say you won $1 million (net after taxes) in the lottery tomorrow. This money will get added to your existing investment portfolio, and may or may not be enough to allow you to fully “retire” as you would like to. As a result, how would you change your investment style?
Make it more aggressive. Sample reasoning: Now that I have a head start and a cushion, why not gamble a little and see what happens? I should buy more stocks, and perhaps I can retire even earlier or with a bigger nest egg. This is given the term Decreasing Relative Risk Aversion (DRRA).
Make it more conservative. Sample reasoning: I’ve just gotten much closer to my goal, and I don’t want to mess it up. I can now invest more in safer things like bonds and be more confident in reaching my goal eventually. Known as Increasing Relative Risk Aversion (IRRA).
Keep it the same. Sample reasoning: I have a set allocation set up, and I see no reason to change it. Anything I don’t spend, I will leave to my heirs. Known as Constant Relative Risk Aversion (CRRA).
By Jonathan Ping | Investing | 9/9/11, 5:00am