|
Let me state the obvious by saying this has been a crazy year. I used to ask new clients how they handled the 2008-2009 market crash when trying to judge how to build their portfolio. Now we get to use 2020 as the benchmark. This year has provided all investors the opportunity to feel the full spectrum of emotions - from complacency at all-time highs in January and February, to complete fear and panic during March and April, to euphoria as markets snapped back faster than any recovery ever. Now is a good time to reflect on how you felt as an investor this year, especially before a potentially bumpy ride in November.
Let's (Re)Assess Your Risk Tolerance
...Life's too short for anything but good coffee.
First of all, just what is risk tolerance?
"Risk" simply means the probability of a permanent loss. In the context of investing we are trying to figure out your willingness and ability to accept that just maybe you could be left with less than you started with, or less than you planned for. And as we look long-term, there's also a consideration for how much risk you need to take to accomplish your goals.
Here's the interesting thing about risk tolerance: Given a long enough time horizon, combined with the low-cost, diversified portfolios you undoubtedly own if you're reading this, the chance of a permanent loss is very low if we don't get in the way of the markets. But that's assuming you are an emotionless robot.
Behavior Matters
If diversified portfolios (owning lots of stocks and bonds from all over the globe) have a low chance of handing you a loss over a long time horizon, then what's the point of assessing risk tolerance? And why doesn't everyone have the same portfolio? Glad you asked.
Determining risk tolerance effectively becomes a task of assessing the likelihood of you, the investor, getting in the way of your portfolio (via messing with the buttons on the magical compound interest machine that your portfolio is). This means determining the chance you might get too nervous in a down market, become impatient after a few flat years, or intervene in some other way.
And this chance becomes especially elevated if you don't have a portfolio that's in the right ballpark for your risk tolerance. If you're a client, I've made my best estimation of this ballpark for risk, but most people don't play in the same stadium forever so it's important to periodically calibrate as you move through life's different stages and different circumstances.
Just Hurry Up with the Task Already!
Here's what I want you to do. Answer these three questions:
- Have you felt very emotional about your investments at any time over the last year?
- Did you have a major life event in the last year? (Job change/loss, marriage/divorce, new family member, or any other major change)
- Has your financial situation changed in a meaningful way? (via a significant change in Assets, Liabilities, Income or Expenses)
If the answer to any of these questions is yes, there's a good chance your risk tolerance may have changed, or needs to be reassessed. And if an answer is yes and we haven't chatted about it yet, then we certainly should schedule some time for an update.
That's it. That's the task. Thanks for reading.
Mark your calendars...
Next month's task: Confirm Your Beneficiaries (Again)
And don't forget...
- Want to bust out some annoying adult tasks faster than once-a-month? Try clicking on that cheat sheet to the right, covering nine of the most important tasks.
- And if you know someone else who needs to be annoyed, sign them up or send them to sign up to receive Annoying Adult Tasks here.
- As always, if you have questions about this task, or would like to chat about any other investing or financial planning topic, please don't hesitate to respond to this email.
|
