What's Your Risk Tolerance

Your portfolio is about risk tolerance

We all want to make money when we invest. We start out investing as long term investors and think we can ride out the crazy stock market. Sometimes we think we are more aggressive risk takers than we actually are. We are prepared to take risk and make big money. But when the ship hits the fan and we are down serious money, some of us get white knuckles, cash out and sell.

Remember 2008? It stunk up the point. Big time. At one point in 2008, stocks were down almost 50% from their highs. Many investors had their risk tolerance tested and took money out of stocks when the Dow was at 8000-10000. As I write this the Dow is at $12,542.

Today, many investors have made good money investing for the last 3 years. The Vanguard Balanced Index (a mutual fund of stocks and bonds) has averaged 8.74% a year for 3 years. Sweet! (source: wsj.com)

Hello!!!! Can we have a birds and the bees investing talk??

When your portfolio grows and is worth more, you have more skin in the investing game. You have more money at stake. You have more to gain and more to lose. Your risk tolerance is tested. Also, more time has passed and you probably need the money sooner – so your time horizon to ride out any future volatility has probably shrunk.

Losing Real Money

Let’s say that you invested $25,000 three years ago. Every month you added $1000 a month to your portfolio. Your portfolio has averaged 9% per year for the last 3 years.

When you first started investing, you were ok being down (losing on paper) 30% on $25,000. That’s $7500 bucks. But now 3 years have gone by and your portfolio is worth $74,177!!! (from the above example) Huge, right?

So are you ok being down 30% on $74,117? That’s a loss of $22,253! If not, you need to restructure your portfolio to match your risk tolerance.

The point I am trying to make is that after 3 years of solid stock and bond market returns, some people have made more money and they have a larger portfolio. More money is at stake and they need to assess their risk tolerance.

I am not telling you to get more conservative. I am encouraging you to review your risk tolerance, and see how much risk you need to take in your larger portfolio to reach your goal. You need to think about how much money you are ok losing. We all know what could go right? You make more money. What could go wrong? You lose money and have to work longer to fund a goal like retirement. Total buzz kill.

This is not individual investment advice. Call your financial advisor to review your specific situation.