Comments on: Should Risk Tolerance Determine Asset Allocation? http://amateurassetallocator.com/2008/05/19/should-risk-tolerance-determine-asset-allocation/ Amateur Asset Allocator Fri, 10 Feb 2012 18:16:33 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Thurston http://amateurassetallocator.com/2008/05/19/should-risk-tolerance-determine-asset-allocation/comment-page-1/#comment-9611 Thurston Thu, 01 Jul 2010 21:10:17 +0000 http://amateurassetallocator.com/?p=178#comment-9611 I disagree. There is nothing worse than not being able to talk a client out of jumping off a cliff. That usually only happens when their asset allocation doesn't match their tolerance for risk, (which I more kindly refer to as their tolerance for change). Losing out on a percent a year because you're being a little too conservative is much better than selling at the bottom of a bear market because once someone leaves the market, it's very difficult to get them back in. In fact, more often than not, they'll repeat the same mistake and only agree to get back into the market once it's recovered and due for another bear market. Therefore, risk tolerance--along with time horizon, rate of savings, & net worth--is and will continue to be the major determining factor when recommending asset allocation. I disagree. There is nothing worse than not being able to talk a client out of jumping off a cliff. That usually only happens when their asset allocation doesn’t match their tolerance for risk, (which I more kindly refer to as their tolerance for change). Losing out on a percent a year because you’re being a little too conservative is much better than selling at the bottom of a bear market because once someone leaves the market, it’s very difficult to get them back in. In fact, more often than not, they’ll repeat the same mistake and only agree to get back into the market once it’s recovered and due for another bear market. Therefore, risk tolerance–along with time horizon, rate of savings, & net worth–is and will continue to be the major determining factor when recommending asset allocation.

]]> By: Steve G. http://amateurassetallocator.com/2008/05/19/should-risk-tolerance-determine-asset-allocation/comment-page-1/#comment-4704 Steve G. Thu, 13 Aug 2009 23:01:08 +0000 http://amateurassetallocator.com/?p=178#comment-4704 The point is well taken, and raises the issue of the separation between behavioural finance and rational decisions. Fortunately/Unfortunately investors more often than not are ruled by emotions. Nonetheless in my experience if the investor has not had the chance to experience at least one downturn, he/she will not be certain how they will react when the time comes to pay the piper. Once you've seen your investments recover, you are most likely ready to withstand the future downturns because you have the experience under your belt. Until that time, risk tolerance will always be the wild card. Since the best laid plans will run amok once panic selling kicks in. I remember many moons ago, when I learned that small cap stocks had always outperformed large cap stocks, I told myself, why then, would anybody invest in large caps? Just keep the small caps for a long time, at least 10 years, since very few have shown losses over that time period, and sleep tight! If you're ready to ride the roller coaster...you will be o.k...but you better know yourself really well! The point is well taken, and raises the issue of the separation between behavioural finance and rational decisions. Fortunately/Unfortunately investors more often than not are ruled by emotions.

Nonetheless in my experience if the investor has not had the chance to experience at least one downturn, he/she will not be certain how they will react when the time comes to pay the piper. Once you’ve seen your investments recover, you are most likely ready to withstand the future downturns because you have the experience under your belt. Until that time, risk tolerance will always be the wild card. Since the best laid plans will run amok once panic selling kicks in.

I remember many moons ago, when I learned that small cap stocks had always outperformed large cap stocks, I told myself, why then, would anybody invest in large caps? Just keep the small caps for a long time, at least 10 years, since very few have shown losses over that time period, and sleep tight!

If you’re ready to ride the roller coaster…you will be o.k…but you better know yourself really well!

]]> By: Four Pillars http://amateurassetallocator.com/2008/05/19/should-risk-tolerance-determine-asset-allocation/comment-page-1/#comment-1390 Four Pillars Mon, 19 May 2008 14:46:19 +0000 http://amateurassetallocator.com/?p=178#comment-1390 I think knowledge is a big part of it. The fact that these "conservative" investors have 10%+ invested in their company stock indicates that they don't know enough to evaluate the riskiness of their portfolio or just as likely they haven't bothered to do so. I think knowledge is a big part of it. The fact that these “conservative” investors have 10%+ invested in their company stock indicates that they don’t know enough to evaluate the riskiness of their portfolio or just as likely they haven’t bothered to do so.

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