I love reading to my granddaughter. One of her favorite stories is Goldilocks, who didn’t want porridge that was “too hot” or “too cold.” She wanted it to be “just right.”
I like the story because it reminds me a lot of investing: your asset allocation shouldn’t be too risky or not risky enough; instead, it should be customized to be “just right” for you.
There’s no need for you (or Goldilocks) to eat porridge that is too hot (aggressive) or too cold (conservative).
Your favorite recipe
Think twice before putting your portfolio in as aggressive a mix as you can stomach. Instead, identify your goals and ask how much you would be willing to compromise in order to achieve those targets. For instance, if you want to retire early and live an extravagant lifestyle, perhaps you’d be willing to invest more aggressively or work a few more years if it meant a larger monthly income once you retire.
Finding the right-sized rocking chair
Filling out a risk-tolerance questionnaire versus actually watching your portfolio drop in value are two separate phenomena. Just because you may qualify as a “risk-taker” on paper doesn’t necessarily mean you should or need to accept risk.
If you “just” need to preserve your funds, your risk tolerance may look very different from that of someone who needs growth. Similarly, if your portfolio’s aim is growth, but you have low risk tolerance, your portfolio will differ from someone’s with a similar aim, but higher tolerance for risk.
Tolerance doesn’t mean embracing risk
Just because you may be able to “tolerate” risk doesn’t necessarily mean you should embrace it. Risk is the possibility of real loss in your portfolio – it shouldn’t be taken lightly. Goldilocks risked a lot when she ate the bear’s porridge, but in the end it worked out for her. Consider the ramifications if risk taking doesn’t work out for you.
Make sure your portfolio is structured “just right” – cookie-cutter asset allocations just aren’t appropriate, either for bears or a bear market.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 1, 2012. Updated July 2020