How Much Risk Are You Taking in Your Retirement Plan?

How Much Risk Are You Taking in Your Retirement Plan?

If I asked you how much risk you are taking with the investments in your retirement plan, what would you say? My guess is nine out of ten people couldn't answer that question in a meaningful way. Answers like "A lot," "Just right," or "not much," may as well be "I have no clue."

We typically think of risk levels in terms of "risk tolerance." This is the appropriate portfolio risk that a person would be most comfortable taking with their investments. While investment advisors are required to assess your risk tolerance and you can measure it yourself on various internet sites, determining what risk you are comfortable with is more of an art than a science. It depends on the investment return you need to produce an acceptable retirement income and the asset allocation that will give you that return, and it is a delicate balance between emotions and financial reality.

When markets are rising, everyone is comfortable with their risk tolerance. I have known retirees who had their entire retirement portfolio in a handful of small company growth stocks—a powder keg of investment risk by any definition of risk. Yet they were entirely comfortable with that risk, because the stocks they were in "always went up." Anyone with a stock that "always goes up" either hasn't held the stock during a bear market or only looks at their brokerage statements once every five years.

To find out what comfort really means when it comes to risk tolerance, it helps to define "uncomfortable." While risk tolerance tests will ask you how far must your portfolio drop before you freak out and sell, the best way to find this out is when markets are in a free fall. If you stay in the markets long enough to see them turn around and rise again, your risk tolerance was probably comfortable. If you sell out, it’s a pretty good indication your risk tolerance was not as great as you or your advisor thought. Unfortunately, selling out at a market bottom is a very costly way to find out the risk you had in your portfolio was "uncomfortable."

If you have been investing for over 10 years, finding your risk tolerance may be simple.
 

  1. Think back to 2008-2009. Did you stay in the markets or get out?
  2. Look at old statements and find out what percentage of your investments was in equities (owning things) and what percentage was in fixed income investments (loaning money through CD’s, money markets, and bonds).
  3. Express this as a fraction with your equity percentage first and your bond percentage last. If you were 66% in equities and 34% in fixed income your asset allocation was 66/34.
  4. If you stayed in the markets, your allocation was probably "comfortable." If you got out, it was certainly "uncomfortable."
     

If your allocation was 70/30 and you stayed in the market, maintaining that allocation should serve you well. Maybe you could even increase the equity portion to 75/25 or 80/20 and still be comfortable.

Related: How I Learned That Diversification Is the Only Investing Game to Play

Conversely, if your allocation was 70/30 and you sold out or reduced the percentage you held in equities, your allocation clearly offered an uncomfortably high level of risk. You will need to reduce the equities in your portfolio. This is especially true if you got back into your old allocation, or something even riskier, to "make up time." You may well be taking too much risk and setting yourself up for failure all over again. You will need to reassess your risk tolerance as if you were a new investor. Next week I'll suggest some ways you can do so.

 

Rick Kahler
Advisor
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Rick Kahler, MSFP, ChFC, CFP is a fee-only financial planner, speaker, educator, author, and columnist.  Rick is a pioneer in integrating financial planning and psycholog ... Click for full bio

How to Be More Creative, Innovative and Confident

How to Be More Creative, Innovative and Confident

Over the years, I’ve coached senior executives, led workshops for leaders at all levels and most recently ran a leadership program for 5th graders at a local primary school. While the complexity of their lives and responsibilities varied widely, some of the core issues that emerged were common. 

Everyone was a little afraid that they were doing “it” wrong and would be caught. Each one held back on how far they’d unleash their creativity. All also desperatelywanted a pat on the back when they did it right and stayed within the known parameters for success. 

In one of my early workshop sessions at the primary school, child after child came up to me and asked for a new piece of paper for their notes. They messed up, wrote too big, or drew a diagram that took up too much space. In general, their paper didn’t look the example I held up in front of the classroom.  

I told them it looked fine to me and encouraged them to use all the space, write around the edges; make it meaningful to them, not me. They seemed unsure, and some of them sneaked clean sheets when they thought I wasn’t looking.  

At the beginning of the next week’s lesson, I started with five words that changed everything.  

“You can’t do it wrong.” 

I repeated myself and walked around the room. 

I looked each child in the eye.  

“You can’t do it wrong.” 

That lesson, I saw some of the most creative output from the group than I’d seen in weeks.  

I’ll bet you feel the weight of doing it wrong. People depend on you, look up to you and need you to be right.  

The thing is, when you feel that constant pressure to be right, you start to play small. You can’t take big chances when being right is the goal and the only measure of success.  

When you’re creative and innovative, and at your best, there is no wrong. It’s all new, all unexplored and all an adventure. In this place, this mindset, every flop is information, not failure.  

When I was an actress, I had auditions where I tried to be the character that I thought the director was looking for, yet didn’t get cast time and time again. When I finally made bold choices that felt uncomfortable and crazy, there were times I still didn’t get cast, but then I finally did time and time again. 

Maybe my early auditions were wrong, and I got a pass, but they were also right because they led me to let go. Without those wrong turns, I would never have unleashed all that was within me. 

Related: Can Being Impulsive Change your Life for the Better?

Your turn. Ready to be more creative, innovative and confident? Start here. 
 

Tonight, when you’re alone in the bathroom after you’ve brushed your teeth, look at yourself in the mirror and speak these five words aloud:  

“You can’t do it wrong.” 

If you want five more, try: 

“I know what to do.” 

“I can figure it out.” 

“I am creative and resourceful.” 

“I won’t hold back now.” 

Don’t feel silly. You’re the only person in the room. After all, there is no instructor in the front of the room looking you in the eye and telling you what you need to hear.  

We all want to be successful, and we all want to get it right. What’s wrong with being wrong? Every wrong turn takes you closer to finding your way to where you’re meant to go. 

Break the Frame Action:
 

If you know someone who needs to hear these five words, tell them. Do it today or tomorrow at the latest. Whatever you do, don’t wait. Maybe they’re on your team, your child or best friend. We can all benefit from someone looking us in the eye to remind us of the lesson too quickly forgotten. 

Alli Polin
Personal Development
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Alli Polin, CPCC, ACC, is a former senior executive with deep experience in leadership, change management, and organization development. Now a writer, coach, and speaker, she ... Click for full bio