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I remember when I managed 401k plans and conducted educational programs for employees trying to discuss risk tolerance. I concluded over the years few people actually understood their own risk tolerance, including me. It was easy to claim being willing to take risk when things were going well, but that confidence quickly disappeared if their account dropped three days in a row.
To help, we built, with “expert” help, three funds – a mix of the mutual funds and Guaranteed Investment Certificate or Contract (GIC) offered by the plan. They were labeled Conservative, Moderate and Aggressive. The Aggressive fund had no GIC and the Conservative fund a good portion GIC. All three automatically rebalanced.
We put a great deal of effort in explaining it all and what it was intended to accomplish. A great deal of wasted effort. They were either not used or misused with many people investing in more than one fund, sometimes all three. I think workers were overconfident with their ability to tolerate risk.
The University of Missouri has a good online and free risk tolerance test. You factor in age, income and decision make based on investment knowledge.
I took it and came out “average/moderate.” I’m not sure exactly what that tells me though. I know I’m not a risk taker, but average. I don’t like being average. I wonder what the results would be if I were 35 instead of 81.
When it comes to money, money needed to live on in the future, I think most of us have a lower risk tolerance than what we may tell ourselves.
Once a year Connie and I go to a casino for a couple of hours with the slots. We have a fixed amount of money we keep separate – about $200 – if we win, we add it to the pot. Over several years the pot hasn’t been depleted, but barely grown either. We limit our risk and since we play only nickel machines, we limit potential reward as well. I recall the thrill of a win on one of those slots with lots of action, sounds and such. And then, inevitably, the odds catch up to us and we slink away after hitting our risk limit.
Betting on ones financial security is a lot different and trying to meet goals of growth and safety is not an easy task. In some cases extreme risk tolerance in either direction may make the goal more difficult.
I’m thinking moving between aggressive, moderate and conservative style portfolios consisted with age or the years to retirement is what most people are thinking.
My score on the assessment was 31. Wife and I are able to be a bit more risk-tolerant due to our pensions which more than cover all our expenses. Most of the questions on the assessment I found to be fairly easy to respond to, but there were a few that caused me to think a bit.
I scored 27, about what I expected.
I was almost completely invested during the 1987 crash, the dot-com crash, and the 2008 crash. In each case, I did absolutely nothing other than normal rebalancing with my investments.
I’m 75 now and it’s highly likely that I have more than enough to last the rest of my lifetime. Rather than using a fixed percentage for each category of my investible assets, I put that I expect to need in the next 5-10 years in bond index funds and cash and the rest in equity index funds. Contrary to typical advice, I’ve increased the percentage in equity funds over the course of my retirement. Most of what is left when I die will go to charities.
I scored 27, high end of moderate risk which is about right.
I do not believe we really know our risk tolerance until we experience a bad bear market like the 2008 great recession. I was planning to retire at the end of 2008 but was able to work 2 more years to buildup my retirement nestegg. I took a hard hit to my portfolio and it took a while to recover.
One thing I learned when I retired was that my risk tolerance declined because I no longer had my human capital working for me. Despite lots of research on retirement, I never read this anywhere.
Interesting risk tool-I scored about where I expected at the high end of the average/moderate category. If my wife took it, I’m pretty sure her score would show less risk tolerance. This difference has led to several discussions, most of them productive. 🙂 It’s also one of many reasons why we have a financial advisor. I don’t think I am likely to forget my 401k becoming a 201k in 2008 and taking 5 years to recover even though I kept contributing and even increasing my contributions. We a have a safety first retirement income strategy. For last 7 years in early retirement we have been 50/50 but last year after buying QLACs our risk capacity increased so we moved to 60/40. Our plan is to move to 70/30 in a couple of years when we move start delayed SS and I turn on conservatively invested deferred comp distributions. A rising equity glidepath.