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How Much Risk We Are Okay With Is Fluid

How Much Risk We Are Okay With Is Fluid

| April 23, 2019

Experience has taught me that the amount of risk people are comfortable taking within their investments is highly variable.


Academically, it's easy to get caught up in things like statistical analysis, glide paths, and probabilities of success and failure.

But, this ignores the emotional part of investing, which is one of the most critical things to understand.  Both working to continue to be aware of it and how it impacts your decisions.

  • I was reminded of this recently with one of my favorite clients told me that they wished they didn't own any bonds.

  • This is the same client that said to me about a year ago: “Why don't we just put everything in 4% tax-free municipal bonds?”


The negative feelings that we experience in down markets is usually more powerful than the appreciation we have for up-markets, but both these positive and negative emotions dramatically impact what we say we want.

Nothing has changed for this individual in the past year, but the new cycle has, and we're currently back at all-time highs.  While, this is an extreme example, this what many of us go through when alternating between fear and greed (or to update this to today’s vernacular “FOMO” or Fear of Missing Out). 

Check out the tracker below from CNN.


I'm working with another person who has a significant wealth event happening soon.  Their question to me is how do we invest now that we're are seemingly late in the market cycle and a recession is probably coming?

This is a smart question to ask.  I understand given the situation and that more money is coming in than they have ever seen.  But the reality is, we had an under-funded retirement plan up until now, and this is going to fund it.  It's not that complicated to map out a proper asset allocation utilizing dollar-cost averaging over time, especially if there's some anxiety over where we are right now. 

I do tell clients that, statistically, because the market is up 70% of the time, it usually makes sense to invest the whole sum.  This has been empirically proven by studying the numbers across the globe.  More information can be found here if interested. 



However, it can be emotionally more comfortable or feel safer to spread those investments over time.  Normally, I’m more comfortable putting the fixed income allocation to work at a faster pace because the risks of loss are so much lower.  The stocks can be purchased slowly on a scheduled basis perhaps monthly for six to twelve months.  I think this can really help with regret aversion, as humans, we hate to have regrets.  Having a market downturn can then make dollar cost (DCA) feel smart, and buying low might bring a positive emotion even if some of your other investments are down.  

Making this choice is a personal one, and a choice you should try to stick to no matter what market noise is going on in the future.  There is always a reason to panic, or wait it out another day.  But that is not how money is made. 


So when the new cycle makes you want to stay in bed and sell all your stocks, or makes you hate the fact that you own bonds because all the stocks are up, remember, your mind plays tricks on you, and a sound investment strategy should never shift with the wind. 


Thanks for taking a look!


Tom Gartner, MSAPM, CFP®



This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.