The TSX dropped 604.99 points today for a percentage loss of 4.75%. If this kind of movement has caused you to second guess your asset allocation you’re probably not alone. Which brings me to the real point of today’s post. It’s not to try and show off my nerves of steel, but rather to point out a personal belief that most people over-estimate their risk tolerances.
I’ll put forth that my premise for saying this is simply because if you had your risk tolerance nailed down before the market volatility hit, you would not be considering making any changes to your asset allocation going forward if you rely on a financial advisor and/or take a passive approach to long-term investing.
I think the problem with getting the right asset allocation is that sometimes people try to emulate a "model investor" when they are setting things up (perhaps by taking a risk tolerance questionnaire). Couple that to the fact that the market conditions at the time of set up probably skew your answers too, and you can see that perhaps there isn’t enough attention devoted to the act and process of determining one’s asset allocation (or the review of it over time).
And just as you might be thinking, "I should’ve been more exposed to fixed income", the opposite thought will be true when markets are back on a bull run – you might be thinking that you should’ve been more exposed to equities… alas, hindsight is 20/20 as always.
If there are any brave souls out there willing to comment (feel free to be anonymous), perhaps you can let us know how much time you spent figuring out the asset allocation of your portfolio when you first set it up? (Please use the "comment" link at the bottom of this post – thanks!)
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