Tag Archives: risk tolerance

My FP Down to Business podcast on the Crash of 2020 and how to deal with it

The Financial Post has just published a podcast about the market impact of coronavirus, via a conversation between me and FP transportation reporter Emily Jackson, host of the weekly podcast Down to Business. You can find the full 19-minute interview by clicking the highlighted text: How Coronavirus market chaos compares to 2008. 

While I have been posting almost daily commentaries on the crisis right here on the Hub from various experts, thus far I have refrained from comment myself, but the podcast pretty much covers my views. One thing that came out of the interview was that there may be big generational differences in how this market crash is viewed.

For baby boomers who are retired or thought they were close to it (read “me!”) this crash has been a traumatic experience, especially for those who didn’t pay much attention to risk management and appropriate asset allocation. At our age (I’ll be 67 in a few weeks), we presumably have finished accumulating our nest egg and our time horizon to recoup any losses is shrunken: young people are in quite a different situation: they have less money to lose and have several decades to get it back.

Worried retirees should be at least 50% in fixed income by now

Fortunately, we have been quite conservative: my own advisor has long counselled being somewhere between 50 and 60% fixed income and — having been reminded of the downside risk of the market yet again — I have been selling a few winners where we can find them with the goal of getting our total cash and fixed income to about two thirds of our total portfolio.

We took some profits as the 11-year bull market raged, although of course hardly enough to dodge the storm entirely.  As with most investors, Covid-19 was a “Black swan” that seemingly came out of the blue. I guess I was lulled into believing that the US president would keep the markets aloft at least until he was re-elected, by leaning on the Federal Reserve chairman and various other levers he possesses. Fooled us again, Donald!

Some readers and at least one advisor I correspond with probably think 67% fixed income is too conservative, but that’s right in line with the conservative rule of thumb that fixed income should equal your age. That leaves about a third in (mostly) non-registered stocks, although we also hold US dividend paying stocks in our RRSPs, along with fixed income (bond ETFs and laddered strips of GICs). Our selling inside our RRSP has been more along the lines of selling half of big winners and “playing with the house’s money,” a phrase our daughter has happily adopted too.

Emily Jackson, host of Down to Business; BusinessFinancialPost.com

On the other hand, as I remarked to Emily, it’s much less of a disaster for younger people: in fact, I’d argue it’s almost good news, financially speaking (not of course from a health perspective). Finally, younger investors have an opportunity to buy stocks and equity ETFs at reasonable prices, and at the same time as interest rates fall, they are getting a break — or soon will — on variable-rate mortgages.

Certainly if I were 20 years younger I’d be itching to buy at current prices, although even then I’d keep some powder dry just in case the bargains become even more tempting.

How bad could this get? In yesterday’s FP, David Rosenberg frankly raised the spectre of a depression and total losses in the Canadian market of 50% or more. See It’s time for investors to start saying the D-word — this economic damage could be double 2008.

Too late to ‘revaluate’ your risk tolerance?

A blog the Hub republished on the weekend from Michael James on Money suggested that now is not the time to reassess your risk tolerance. See It’s too late to ‘revaluate’ your risk tolerance. That blog generated a fair bit of discussion on Twitter. Again, this could fall along generational lines. If you believe markets are only half way down and you want some cash to deploy to scoop up bargains at the bottom, then you can sell down some non-registered winners and losers, ideally in equal proportions to make it net tax neutral. Massive up days like Tuesday are an opportunity to do that. Continue Reading…

It’s too late to ‘re-evaluate’ your Risk Tolerance

By Michael J. Wiener

Special to the Financial Independence Hub

It’s not easy to know your true investment risk tolerance. Fred Schwed explained this problem wonderfully in his book Where are the Customers’ Yachts?:

“There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.”

Now that the stock market has tanked and investors are learning what it feels like to lose money, experts like financial planner Jonathan Bednar are saying “This is a great time to re-evaluate your true risk tolerance,” and “If you are nervous then you may be taking on more risk than you are really comfortable with and should rebalance into a more conservative portfolio.”

This advice amounts to “sell stocks while they are low.” The best time to figure out that you don’t have the stomach for a stock market crash is while prices are still high. It’s now too late to reduce your stock allocation without permanently locking in losses.

Easy to think you have high risk tolerance in a bull market

Unfortunately, when stocks are soaring it’s far too easy to convince yourself that your risk tolerance is high. So maybe we need a different strategy. Perhaps we should record videos of ourselves saying how we feel after stocks crashed, and set a calendar reminder to watch this video annually. The next time stocks are soaring again, maybe the video will help us lighten up on stocks while prices are still high. Continue Reading…

What’s your real Risk Tolerance? Chinese Face Reading tells us Listen to your Ears

By Jane Hawley Edward

Special to the Financial Independence Hub

My Google search for “choosing a financial advisor” yielded more than 30 million hits. It appears to be a popular topic. The recommendations over the first 20 pages were variations on:

Education and Experience

Compensation and potential conflicts of interest

Investment suitability to the client

Yet I propose another characteristic for consideration; one that can quickly help assess one’s risk tolerance and show whether a client and advisor are compatible.

It comes from the ancient Chinese science of Face Reading, where ears are the physical feature that shows how much innate courage and risk-taking ability a person has. The larger the ear, the more comfortable they are gambling physically, in their choice of work or taking risks with money.

To understand the kind of risk-taking you can naturally handle, all you have to do is measure the size of your ear.  Measure it by holding your thumb and index finger in a “C” up to your ear. If it matches in size, you have a small ear.  A large ear is the size of your thumb and middle finger formed into a “C”. A medium ear is between those two sizes.

The broader your ear is across the top, the more comfortable you are with financial and emotional risk.  Chances are that you would be the type who would be more willing to try aggressive growth stocks or volatile markets for potentially larger gains.

In contrast, if your ear is narrow across the top, you’d tend to be a conservative and cautious investor. Your preference would be to invest in safer low-risk vehicles because your main goal is to preserve savings because you feel the pain of losses more intensely than the comfort of gains.

Matching to your financial advisor’s

That’s where matchmaking our ears to our financial advisor’s gets interesting.  A client with cautious, narrow ears may be most comfortable with a similarly narrow-eared, like-minded advisor.  But there’s merit in matching opposite traits; a wide-eared advisor could construct a portfolio that offers protection plus opportunity for moderate growth.  Or a narrow-eared advisor could help curb a high-risk tolerant client from gambling on a poorly diversified portfolio or too speculative an investment.  In either case, together they could temper each other’s risk taking appetite.   The main point is to know what each brings to the equation. Continue Reading…

Polling financial literacy: results both encouraging and worrisome

Graham Bodel

By Graham Bodel, Chalten Advisors

Special to the Financial Independence Hub

The Canadian Securities Administrators (CSA) just released its 2016 CSA Investor Education Study, an assessment of financial literacy across the country.

Some of the findings are encouraging while others are a little bit worrying.

There are clearly still key gaps in investor knowledge and behaviour.  For example, while many investors rely exclusively on advisors for investment information and knowledge very few investors actually check to see that their advisor has the appropriate registrations.  Some other key points:

Risk Tolerance

To begin with, findings show that more and more people seem to be paying attention to their risk tolerance, which is great!  Risk tolerance is what should drive the mix of different investments that you hold, often referred to as asset allocation.  Risk tolerance is driven by your need, ability and willingness to take risk and should be informed by your current financial situation as well as near and longer term financial planning goals.  Risk tolerance can definitely change as your circumstances change or as you enter different stages of life so it is worthwhile checking periodically to ensure your investments are suitable for your risk tolerance.

Investment Knowledge

Survey respondents were asked to answer seven questions to assess general investment knowledge.  6 of 10 people answered 4 or more questions correctly, which is about the same as in previous surveys.  25% of respondents answered 6 of 7 questions correctly indicating a “high” level of investment knowledge.

Continue Reading…