Now is a Good Time to Decide Whether Your Portfolio is Too Risky

Back in March 2020 after stock markets had crashed, I expressed my disgust with the chorus of voices saying that this was the time to re-evaluate your risk tolerance.  That advice was essentially telling people to sell stocks while they were low, which makes little sense.  After the crash it was too late to re-evaluate your risk tolerance.

I suggested “we should record videos of ourselves saying how we feel after stocks crashed” and watch this video after the stock market recovers.  Well, the stock market has long since recovered.  Now is a great time to recall how you felt back in March 2020.  Did you have any sleepless nights?

Now that markets are near record levels, it’s time to consider whether permanently lowering your allocation to stocks would be best for you in anticipation of future stock market crashes.  Unfortunately, this isn’t how people tend to think.  It’s while stock prices are low that they want to end the pain and sell, and it’s while stock prices are high that they feel most comfortable.

Comments

  1. AnonymousJanuary 19, 2022 at 9:24 AM

    Stock market crashes are a good time to buy stocks on sale!

    ReplyDelete
  2. GaryJanuary 20, 2022 at 9:38 AM

    Well put Michael. We reduced our risk in December and as I watch markets go down this month I feel we made the right decision. I’ll sleep like a log tonight. 😃.

    ReplyDelete
    Replies
    1. Michael JamesJanuary 20, 2022 at 9:42 AM

      Hi Gary,

      My intent was that if you choose to reduce your stock exposure, it's to be a permanent reduction. Perhaps this is your intent as well.

      Delete
    2. GaryJanuary 20, 2022 at 4:59 PM

      Yes, it’s permanent as we are in our middle 70’s.

      Delete
  3. UnknownJanuary 27, 2022 at 12:29 PM

    My how things can change in a week. Extreme volatility over past several trading days has not altered my risk tolerance. Some days are Woohoo, some are Damn and others just OK.

    It felt somewhat painful last year to sell equities and buy bonds to get back to target allocations, but the slump in stock markets this year confirms the need to rebalance and stick with a plan.

    I am curious how many emails your automated approach triggered over the recent month.

    ReplyDelete
    Replies
    1. Michael JamesJanuary 27, 2022 at 4:12 PM

      Hi Bob,

      Sounds like you didn't have trouble during the 2020 downturn and should stick with your plan.

      I didn't pay close attention to my portfolio recently, but the few times I looked told me that I almost got to the point where I had to rebalance in one direction, and then later almost had to rebalance in the other direction. But my threshold hasn't been tripped recently. My software only checks once per day, so it's possible that it missed a rebalancing opportunity.

      Delete
  4. UnknownJanuary 29, 2022 at 11:05 AM

    In Mar 2020 I plowed a bunch of money (at least for me) into stocks with high dividend payout rates. Wished I could have put more but I didn't have the fund/risk tolerance to shift so much of my net worth to stocks. By mid 2021 I was up 80% and collecting 5 to 10 % dividends.

    I saw what the 2008 downturn did and what investing in the dip could mean.

    ReplyDelete
    Replies
    1. Michael JamesJanuary 29, 2022 at 11:14 AM

      Unknown,

      I'm glad it worked out for you. You didn't have to decide what to do if stocks kept falling after you bought them.

      At the time, many taking heads were advocating the opposite by telling people it was OK to be selling stocks.

      Delete

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