Assessing your Risk level

fun4everyone wrote: »

Another point to consider about investment falls, which I feel is often overlooked, is the time they last for.

A 40% drop is easier to stomach if it is over quickly and recovers sharply. However look at something long and drawn out like the dot com crash. That bear market was a real stinker that lasted 3 years and wiped large percentages off equity portfolios. It's easy to imagine you can handle a 50% drop but can you imagine logging in every day just to see your valuation go down and down and down and down day after day month after month year after year? That is psychologically hard to stomach as you will really question if it was a good idea to invest or not.

It's easy to give the advice "only check once a year/quarter" but being honest the reality is most people check daily, especially with significant sums invested. Headline news about stocks dropping causes people to check more frequently also.

That’s when you take up a less stressful hobby such as base jumping, cave diving or ice hockey to take your mind off the markets. I opted for the third choice.

ValiantSon wrote: »

At a guess, VLS 60.

For what it's worth I came out as a 5, but the bulk of my investments are in VLS 60. However, this has more to do with the figures Alex gives, where returns between VLS 80 and 60 are not that far apart, but the volatility is. I'll take the greater risk if the anticipated returns warrant it: if they don't then why would I?

You are right, it was not much of a sacrifice to add a high bond component to the equities over the 30 year period ; adding 20% more bonds dampened the volatility of the equities somewhat without over-diluting their performance. So, the extra returns from going 80% equity perhaps didn't warrant it.

But, what we have just had in the bond markets is pretty much a 30 year bull run which is coming to an end, so a tool that shows you how the bond returns were quite high and not a drag on your equities over those 30 years, is not necessarily what you need to hear.

If you are talking about whether the *anticipated* returns (from now going forwards) warrant a particular approach, that's different from whether with the benefit of hindsight, the recorded returns seemed to warrant it.

One could say that 60/40 was the 'sweet spot' and there is at least one prolific poster on these boards who got nice and wealthy by using that ratio over three decades by investing a large proportion of income while tilting his equities to the US market which happened to be the best performing market in the developed world. He would say that based on his personal experience, a 60/40 mix of equities to bonds in trackers is everything an investor needs.

IMHO, history and hindsight is great for coming up with theoretical proofs of what you should have done over a period but chunks of history that give conventient results can't unfortunately always be relied upon for a look-forward projection.

The projection in Alexland's later Vanguard link is only a projection of course but it does at least incorporate the recent state of the equity and bond markets rather than just saying that for a given proportion of historic 10 year time periods from different start points, bonds did this and equities did that.

From that later link you are not looking into what you would have got with the *actual* strong bond markets of the last three decades but what you might get given a whole range of potential outcomes for bond markets. Which might legitimately not be as strong as they were over the previous three decades, changing your conclusions on the optimum mix, even if there is some maths elsewhere that says the 'efficient frontier' sweet spot in terms of stocks vs bonds is 60:40.