If you are like most Canadians, your philosophy on risk-taking is probably similar to your philosophy on regular exercise – although you understand that both may be good for you (and necessary), the thought of doing either makes you queasy.
Many prudent investment strategies have been carelessly cast aside the moment volatility rears its ugly head. Investors must be honest with themselves about their willingness to take risk before they put an investment plan into motion. If an overly aggressive portfolio keeps you up at night worrying, you may need to reconsider your overall equity exposure.
In his book, “The Only Guide You’ll Ever Need for the Right Financial Plan,” Larry Swedroe attempts to quantify the extent of losses that could potentially occur in a portfolio, based on an investor’s overall exposure to equities. For example, an investor with an allocation of 50% equities and 50% fixed income may experience periods when their portfolio decreases by 20%. Swedroe’s chart coincides very closely to what losses our clients experienced during the financial crisis of 2008/2009.
Source: The Only Guide You’ll Ever Need for the Right Financial Plan – by Larry Swedroe
Although your willingness to take risk is an important determinant for how aggressive your portfolio can be structured, your ability and need to take risk also play essential roles (more on these in future posts). If you are finding that your willingness to take risk is not as strong as you once thought, you may need to save more or reduce your lifestyle expenses in order to take less risk with your investments.