The Risk Tolerance Rollercoaster
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By: Michael Foster, CFA, CFP®
I was a cautious little kid. I followed directions, asked a lot of questions, and (knock on wood) still have never broken a bone. I also didn’t really like big rollercoasters until I was a teenager. I’d go to the amusement park, ride the wimpy rides, and be thankful my feet were still safely on the ground. Once I finally got the courage (bribe from a family member) to ride a serious rollercoaster, I realized I had been missing out.
The natural next question is, “Hey Michael – we don’t care. Why are you talking about rollercoasters?”. Well, I came across a topical article I really enjoyed this last week around market volatility titled “Investing Can Be a Roller Coaster: Three Tips for Riding Out the Ups and Downs”. The piece discusses themes we often talk to our clients about like understanding markets can move significantly in any one year and staying in your seat, even when the going gets tough.
My favorite portion of the article focuses on the largest, smallest, and average annual returns for a few different portfolio allocation samples. These samples represent a group of indexes ranging from 100% stocks/0% bonds (highest reward and volatility) to 0% stocks/100% bonds (lowest reward and volatility). When working with clients, finding an allocation that helps them meet their goals while being able to stomach the volatility is crucial. Everyone wants the market ups, but not everyone can handle the inevitable dips that come along with it. If market volatility like we’ve experienced the last few weeks is causing you anxiety, constant statement checking, lost sleep, or similar, you might be invested in too risky of a portfolio.
It’s easy to look at the allocations above and decide that a 12.01% return is better than a 5.26% return. I’d also encourage you to look at the largest one-year decline to decide if that’s something you can stomach along the way. Typically, the higher return potential comes with greater ups and downs along the way. Solid long-term returns don’t come for free, and investors need to be willing to accept ride with the portfolio through time. Successful long-term investing, like a rollercoaster, doesn’t tend to work as well if you exit your seat in the middle of the ride.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
Nothing in this material should be construed as investment advice offered by Dolan Capital Advisors, Inc. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction, or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction, or investment strategy. You should speak with your own financial professional before making any investment decisions.
Past performance is not indicative of future results. Dolan Capital Advisors, Inc. does not guarantee any specific outcome or profit. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Risks will arise, and an investor must be willing and able to accept those risks, including the loss of principal.
Certain statements contained herein are statements of future expectations and other forward-looking statements that are based on opinions and assumptions that involve known and unknown risks and uncertainties that would cause actual results, performance, or events to differ materially from those expressed or implied in such statements.
Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.