Risk. Have You Had Your Recommended Daily Allowance?
It's easy to criticize risk these days, as we're constantly bombarded with a barrage of warnings about every possible danger. But how much risk is too much?
We can't tell you exactly what your risk tolerance should be, but this post will help you figure out if you've had your recommended daily allowance.
Take a look at this handy chart, and see what level of risk you're exposing yourself to:
You can also use the chart to see how much risk you allow others to take on your behalf.
Are you part of an organization that manages a lot of people's money? If so, here's a fun little test: Look in the chart, find "High Net Worth Families" – that's the level of investing risk you should allow your clients to take. Now take a look at your current client portfolio allocations. Are you letting them take on more risk than they should?
The bottom line is this: You can't control the level of risk other people should take. But you can control the amount of risk you take on yourself. So make sure it's an appropriate amount for your circumstances, and don't judge others until you've looked in the mirror.
As always, if you have questions or suggestions, please leave them in the comments below. I'm always glad to chat about risk.
Calculating Risk Tolerance:
This chart uses historical data from the S&P 500 Index, adjusted for dividends and splits. The current value of the index is included in each cell. The orange and blue numbers are the actual yield, and the red numbers (the horizontal lines) are risk levels we calculate using a standard deviation calculator. You can adjust these numbers to see how they change as your portfolio changes in size.
You will notice that the cells along the bottom are shaded. That is because we've recommended those levels to our clients in the past, based on individual circumstances.
For example, people with $2 million or more in investable assets should consider a portfolio allocation of 60% stocks, 20% bonds and 20% other asset classes.
You can also find it helpful to use the chart in Excel, which you can download here. Just open the file and adjust the numbers as desired for your particular situation.
Image credit: Bonsai Trees via photopin cc
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Michael LespertMichael Lespert is the author of over a dozen books on personal finance, investing and retirement planning for both beginners and advanced investors alike. He is also the co-founder of the award-winning website and blog InvestingAnswers.com. You can follow him on Twitter at https://twitter.com/mlespert
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Conclusion
Do you want to know if you're taking on too much risk in your life?
Are you part of an organization that manages a lot of people's money? If so, here's a fun little test: Look in the chart, find "High Net Worth Families" – that's the level of investing risk you should allow your clients to take. Now take a look at your current client portfolio allocations.