Re-evaluating Your Risk Tolerance

Is it time to re-evaluate and perhaps change your risk level?

Events since September 2008 have caused some clients to wonder about the propriety of their tolerance for risk that was established during more bountiful times. Have they exposed their portfolios to more risk than they bargained for? The Sept. 11, 2001 terrorist attacks on the World Trade Center and the Pentagon, as well as the significant fall of the equity markets (really since March of 2000 - about 3 bad years in a row), have brought this question into sharp focus. Through direct experience of a Bear market, people no longer believe that equity markets only go up. Some are finding their monthly investment statements disturbing with their large ups and downs.

Not only has there been greater volatility (up & down extremes) but we also believe the future will see lower overall rates of return in the equity markets than the previous 5-10 years have see.  Many advisors now feel a range of 6% - 10% is a more realistic expectation that the higher amounts  that many investors expected based on 1995-1999.  Also bond returns may be in the neighborhood of 3% - 6%. A shift in thinking to these levels of expectation is in order.  Note that no one can assure what future returns may be.

With the more balanced perspective provided by the current bear market and having lived through this 2000-2002 “bear market” juxtaposed to the prior “bull market” you may be in a better position to assess your true risk tolerance. Thus, the question arises of whether one should adjust one’s risk tolerance to a different stock-to-bond ratio than they have had previously. For example, in the past, many of you who had preferred an 80-20 asset allocation, may perhaps now find 60-40 a more comfortable blend of risk-and-reward?

There is not a “right” answer. Only your “gut” can answer these questions, ultimately. The point is to make sure it is a conscious and deliberate decision.

We do have a very good Risk Tolerance Questionnaire that can guide you, and us, to the proper allocation. Perhaps it is time for a face to face consultation to address these issues, and any others you may have.

In addition to the RWTA Risk Tolerance Questionnaire we now also have Finametrica. Finametrica is a state of the art tool developed by a team of  experts in behavioral finance.  This can be done "online" if you wish.  See the About You Tab for various options to help you determine your risk tolerance. The "Risk Quiz and Presentation" and the "Asset Allocation Planner"  both provide online questions and then provide a recommended category or allocation.  This can be useful information to provide to your planner.

If you feel you are ready to take a fresh look at your overall portfolio diversification to see whether changes are in order, please contact us right away by telephone or email. We will start with a new Risk Tolerance Questionnaire and proceed from there. The decisions you make with our assistance, will make sure your portfolio stays on track with your long-term goals!