Investors likely don’t have just one risk tolerance; they have several. Our approach to solving for risk is to develop a composite of different risk tolerance worksheets. The goal of this ‘mosaic’ is to create a personalized risk tolerance. Using this simple step-by-step exercise, you will now have a tailored investment philosophy that supports, synergizes, strengthens, and ultimately maximizes your overall financial planning masterpiece.
Step1: Assemble Your Investment Toolset & Inventory
- Select a risk tolerance questionnaire
- Create a checklist of existing asset classes and their current percentages
- Obtain all available investment options in your employer’s retirement plan
Have a family “team” mentality, leverage each other’s strengths, and offset each other’s weaknesses.
Step 2: Refuse, Reuse, Recycle
- Repurpose existing strategies
- Coordinate asset classes in your employer’s plan(s)
- Identify any missing asset classes and reject overlap
Proper asset allocation isn’t just historical returns. There are several variables. Also, keeping investments that are working well for you is part of an objective planning process.
Step 3: Compartmentalize Your Money
- Complete a risk tolerance questionnaire for each of your Short-Term, Medium-Term, and Long-Term dollars
- Focus on the specific objective of each ‘pot of money’
- Understand that no one company can do everything for you
- Highly effective strategies can be straightforward
If the money is 100% taxable, partially taxable, or 100% tax-free, the money will have inherent strengths and weaknesses. Embrace these and try to enhance their benefits and features to suit your planning. Consider the core functions, your personal accessibility requirements, and how the money naturally enjoys being treated from a tax and income perspective.
Recommendation: They’re Selling You The Sizzle, Not The Steak
Step 4: Reassemble Your Strategy
- Consider your total income, tax, and liquidity requirements
- Consider any guaranteed-like offsets to reduce “withdrawal pressure” (i.e. Social Security, pension, annuity, or Real Estate income)
- Identify new opportunities for efficiency
Don’t take risk for risk’s sake. Take risk when you can afford to do so and the chances of making money are worthwhile and likely. Know when to say when.
Step 5: Implement
- Consider your deployment timing (i.e. Dollar Cost Average, Bond laddering)
- Confirm and coordinate your risk tolerance with your spouse (and all affected parties)
In general, I suggest listening to those people who have collected all the data and emersed themselves in your financial situation. Financial representatives, family, and professionals may have knowledge and experience, but sound advice requires the whole picture. However, do embrace the various ‘micro-managers’ for their specific skillsets, but ultimately, you’re the boss and should know what’s best. After all, it’s your money, not anyone else’s, right?
Step 6: Commitment & Reinforcement
- Strive solely for “educated” decisions
- Trust yourself
- Own up to your decisions; learn from mistakes
- Get fiduciary advice as needed
Always consider what I call the ‘long-game’ and the ‘short-game.’ The short game is what things look like right now. What does your gut say? The ‘long-game’ is the big picture. Ask yourself… How can sometimes diametrically opposing forces somehow work together? No one is able to really ‘time the market,’ but sometimes it’s easier to make a judgment call than others.
Step 7: Repetition
- Be skeptical of fact-less advice, and make changes sparingly
- Immediately investigate outside changes to variables
- Develop a habit of quarterly rebalancing check-ins
Putting together an effective risk tolerance strategy doesn’t take much, just diligence. I always say it isn’t rocket science its “habitual” science or the art of just doing.
Editor’s note: This blog offers informal investment and financial planning advice. We know nothing about your unique financial situation. The buying and selling of any financial product or security should only be considered in context. If appropriate, seek the counsel of experienced, ideally objective, financial, tax, or estate planning professionals. Past performance is not indicative of future performance.