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Reasonable Risk Tolerance


"How risk tolerant should i be at my age (37)?  What is reasonable?"

It is difficult for me to tell you how risk tolerant you should be because that is truly an individual decision.  I can tell you that given a presumably long time horizon until your retirement and hopefully a long retirement, you would have lots of time to not only grow your money but also to recover from any downturns in the market.  Given your age alone, a portfolio with a high percentage in equities, 70-80%, should provide you with adequate growth while outpacing inflation given historical data.  A diversified* asset allocation within those equities can also help reduce some risk.

The main concern regarding risk tolerance is not the growth of your investments.  Mostly everyone is comfortable watching their life savings grow.  It is whether you would remain comfortable enough during a downturn in the market to maintain your investment strategy.  What derails individual investors is the panic that accompanies a downturn in the market and results in abandoning a well defined strategy and selling off a portion or all of your investments.  More often than not, they wait too long to get back into the market and have missed out on a significant portion of the recovery.  They will never be able to get back what they lost during the time they were out of the market.  More often than not, those that try to time the market or trade on emotions end up performing significantly worse than those that invest for the long term and rebalance their portfolios.

What did you do during the 2008 Financial Crisis when the dow dropped 45% from October 2007 to February 2009?  This should shed some light on how you react to downside risk.  If you sold when you couldn’t stand it any longer, you probably should take on less risk in your portfolio.  If you stayed the course or better yet invested more to rebalance, then you can handle a portfolio that is more heavily weighted in equities.

*Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.