Understanding your attitude to risk and learning from mistakes

Alexland

Bobziz said:

Interested to hear from those with longer term investing experience about how your tolerance to risk has changed in response to major market corrections/crashes.

I have grown sufficiently tired of crashes and corrections to worry about them. If anything they are just opportunities to invest a little bit extra and for the dividend reinvestment and regular contributions to buy more units. The most important thing is to have confidence in the underlying investments and accept the stock prices on any given day will ebb and flow like the dog running around his master on a walk up a steep hill. Last year we were down a few hundred thousand during the covid crash and it didn't worry me.

Diplodicus

Lol Alexland

Alexland

Diplodicus said:

Alexland

Thanks for that but if your portfolio of good investments is down what's the point worrying about it? If you needed to spend any of the money anytime soon then you should have derisked already so it's just a case of waiting for however long it takes to recover and go on to further gains.

kuratowski

When I started my first DC pension in my twenties, I didn't understand anything about investments or risk.  I looked at the brochure on the fund choices available to me, didn't like the sound of anything described as risky, and so I eschewed the global equity index tracker that was the default, and made some very strange (with hindsight) choices.  Fortunately this was at the start of my career and the amounts in question were fairly small.  I later learned a lot more, revised my investment choices and increased my contributions year after year, leaving me now in a quite comfortable position in my mid-forties.

One lesson I take from this is that the word "risk", as it is used in investment literature, does not mean the same thing as it means to an ordinary layman.  And another lesson is that beginners perhaps should not be too quick to second guess the default choices!

El_Torro

I've been paying into a workplace pension since 2001. If memory serves I also opened my first Stocks & Shares ISA in the same year, might have been a year or so after though.

As others have highlighted the biggest potential mistake is panicking when things go bad and selling up. Personally I've never made this mistake. During the GFC (2008) I kept things as they were, and continued to pay in as and when I could. I think part of the reason was sheer laziness, not really looking at how my investments were doing and assuming they would recover some day anyway. Back then my assets were not as high as they are now, not sure if I'll be as nonchalant about it when the next crash comes.

If I had to highlight any flaws in my otherwise flawless self I would highlight that there are probably two things I could have done better:

Firstly diversify more. For example for a period of time I had all my ISA investments (admittedly not a very impressive amount) in Asia. I don't know if I would have been better off in a global tracker (I could check but it doesn't really matter either way now anyway) but knowing what I know now it wasn't the best way to invest regardless.

Secondly focus more on my ISA than my pension. One point especially: In 2011 I put a pretty big (pretty big for me at the time anyway) lump sum into my pension, even though I was a basic rate tax payer. If I had known how my career and finances would evolve over time I would have put that money in a S&S ISA instead. Hindsight is a wonderful thing of course.

Thrugelmir

Alexland said:

Bobziz said:

Interested to hear from those with longer term investing experience about how your tolerance to risk has changed in response to major market corrections/crashes.

I have grown sufficiently tired of crashes and corrections to worry about them

One day will you care deeply. 

strawb_shortcake

I'm less than a year in to investing for the first time. I am very typically risk adverse and watch my money carefully, but for investing I've gone higher risk and 100% equities in a global tracker. I do justify it with the following reasons.

1. I have only invested what I can afford to risk, money would otherwise be likely wasted on shoes and perfume.

2. I have significant (for me) savings in easy access accounts, this is due to possibly needing it in next few years. My investment is circa 3% 

3. People advise that past performance is no indication of future performance, which I agree but it does tell you that it's going to be a bumpy ride and drops are to be expected.

4. My LISA is inaccessible for a minimum of 21 years, it just makes sense to me for now to take higher risks as I have time to ride out the dips.

5. The aim of my ISA is to give me a lump sum towards pension age, this is only a nice to have and not really needed to support a comfortable retirement.

Obviously this is all based on my current circumstances, if my investment was a higher percentage of my "wealth" then I suspect my risk tolerance may be adjusted as it will as I get older and closer to drawing out.

jamesd

I really started investing with the initial market downturn in early 2008 when I set up a new pension salary sacrifice scheme to take me down to minimum wage, recognising that there might be more drops later. There were and in March 2009 near the market bottom I invested more using credit card borrowing. That was done based purely on academic knowledge and recognising that I might be seeing a once in a lifetime opportunity at those prices. In the 2020 Covid crash I added a bit of an investment trust I'd been interested in for a while but made no other changes.

Now retired for a few years my investment risk tolerance might have reduced a bit but it's not the biggest factor.

My capacity for loss has decreased and I consider this in my decisions.

I'm conscious of the academic research into safe withdrawal rates in retirement and what asset mixes produce the best outcomes for historic analysis, usually 50-75%, which is lower equities than my own raw preference.

I'm also aware of the potential value of cyclically adjusted price/earnings ratios in determining when markets are well or badly priced and in determining projected ten year returns and include that in my decision-making about how much to have in equities in which countries vs other things.

As well as investment risk tolerance there's risk of missing retirement objectives and that can require more or less equities.

The overall effect of these things is that I'm now investing below my pure investment risk tolerance.

bostonerimus

When I was working I had a pretty classic 60:40 portfolio. I started in the late 1980s so I've been through some big ups and some big downs. I haven't managed things perfectly, but I have generally followed rebalancing rules through the volatility and seen things recover to the point where I'm now retired and comfortable with an 80:20 portfolio because I don't need income from the portfolio.

My advice is:
Keep costs low
Keep your portfolio simple
Use every tax advantaged account you can
Have a rebalancing strategy and stick to it through tough times

MaxiRobriguez

jamesd said:

I really started investing with the initial market downturn in early 2008

Now retired for a few years

Interesting - thought you had a longer history of investing than 2008 James.

May I ask how you managed to go from starting to retiring within what appears to be ten years? What sort of contributions were you making? Did you have capital to start with in other areas etc?

Edit: And appreciate this deviates from OP's topic quite a bit so happy to receive in a PM instead if that's more appropriate (and you want to reply! )