The TSX dropped 604.99 points today for a percentage loss of 4.75%. If this kind of movement has caused you to second guess your asset allocation you’re probably not alone. Which brings me to the real point of today’s post. It’s not to try and show off my nerves of steel, but rather to point out a personal belief that most people over-estimate their risk tolerances.
I’ll put forth that my premise for saying this is simply because if you had your risk tolerance nailed down before the market volatility hit, you would not be considering making any changes to your asset allocation going forward if you rely on a financial advisor and/or take a passive approach to long-term investing.
I think the problem with getting the right asset allocation is that sometimes people try to emulate a "model investor" when they are setting things up (perhaps by taking a risk tolerance questionnaire). Couple that to the fact that the market conditions at the time of set up probably skew your answers too, and you can see that perhaps there isn’t enough attention devoted to the act and process of determining one’s asset allocation (or the review of it over time).
And just as you might be thinking, "I should’ve been more exposed to fixed income", the opposite thought will be true when markets are back on a bull run – you might be thinking that you should’ve been more exposed to equities… alas, hindsight is 20/20 as always.
If there are any brave souls out there willing to comment (feel free to be anonymous), perhaps you can let us know how much time you spent figuring out the asset allocation of your portfolio when you first set it up? (Please use the "comment" link at the bottom of this post – thanks!)
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I didn’t put a whole lot of time into my current allocation – I looked at the MoneySense "couch potato" allocation, said "that’s too much fixed income for me", and reduced it to a level I felt comfortable with, then allocated the rest, emphasizing Canadian equities (slightly) over US and International (individually). Total time? Maybe 5 minutes.
At first I didn’t put much thought in to anything at all. I just signed up for the RRSP plan through work and set picked my own set of funds rather than using their ‘life plan’ allocations. There wasn’t much choice in their plan at all. At the time (since the goal was saving for a house) I was a little easy on the equities. I still did end up losing a bit in the March/April range last year just before my house closed. Looking back once the decision was made to actually use the funds, I should have moved everything out of equities. If I remember correctly my withdrawals happened right in the dips in March ’07 when the TSX was in the high 12800’s or so. Grand scheme, I’m in a house and my kids love it way more than the 680 sq foot apartment (now 1150 sq foot house with a yard and a basement).
Now that I’m going for retirement in 37 years I’m 100% in equities in the RRSP. It’s taken a hit lateley, but I don’t even remember my logins to check. I have it fairly even in a Canadian, US, International mix that I like. I’ll check it in a few years.
For my sons RESP I have a similar mix. He is 3, I’m using TD E-Funds. I actually used todays drop to move my contributions (which go in to a money market fund) in to the E series Canadian Index, the E series US Index (Canadian Dollar) and the E Series International Index. Is it a smart move? Maybe not . . . I’ll know in 2009 . . . but I have about 15-17 years to recover. When he turns 10 I plan to start easing off slowly each year, but until then it’s full steam ahead.
After my spouse is back to a full time income rather than school and building her business I think I’ll switch the RRSP over to income based investments and go for gains and dividends outside to be a little more tax efficient. I’d really like to get ahead of my finances and eventually have equal incomes from investments and my work. That way, if either one fails I just fall back on the other. I dream of the day my plan becomes a reality.
As for the question of how much time? I’m not sure, if you spend all the time I spend reading about personal finance, then days. If you just take the time actually figuring out what I think is best and implementing it then I would say a couple hours.
Wow, Traciatim – you need a blog!
I have put way too much time into my asset allocation but I have to admit that the market decline doesn’t bother me at all – in fact I am drooling at the buying opps!
Mike
Thanks for the comments guys, I think the bloggers and members of the personal finance blogosphere will certainly skew the results – but that is a testament to the value of self-education.
For the other 99% of the population, I think 10 minutes is the average amount of time spent on asset allocation.
Traciatim – I agree, you should start a blog – or maybe you would like access to this blog through a few guest posts perhaps? To see if you like it? :) Let me know!
I have been patiently waiting in cash since mid last year and will wait another half year or so. Retirement savings are dollar cost averaged — I don’t get to see these, so I don’t care.
As I’m new here I’m still learning the best option for me. First, I’m reading a lot of blogs about PF. Yesterday I made my first investing – I bought a book – Stop Working. Here’s how you can – from Derek Foster and I’d say I’ve read more than a 100 pages in one night. That’s how I feel excited :) I also have a house.
I have is my RRSP and I contribute with an amount from my salary bi-weekly. I also buy stocks from my company as they match 50% at the end of the year. I can see the price is coming down, but I didn’t change anything. IMHO, I really don’t know if it is a good or a bad thing.
That’s why I’m still learning. Hopefully, I’m doing right.
I’m retired and have spent almost two years out of the market, building a home, while owning a second one, using all available capital to float that exercise. I sold the original home in May, 2007 and slowly got back into the market. I spent a long time working on the asset allocation as I will have little to no money to add to the pot.
I subsequently read where John Bogle says that anyone who can’t imagine a 20% drop in the markets shouldn’t invest in stocks, So I took my numbers and worked a 20% drop into them and then a 30% drop just "for fun". It was gut wrenching to see the numbers, but confirmed my asset allocation was right for me. I was away last week and watched each day from Tuesday though Friday while I lost 2.5% per day. Then Monday and Tuesday happened. I’m bruised but not broken.
One interesting thing was seeing a 600 point drop on Monday followed by a 500 point recovery on Tueday. If one were to have slept through Monday, one would see a 100 point drop Tueday from Friday and wouldn’t be terribly concerned.
Good point – as of the time that I write this, the TSX over 1 week is actually ahead.
On January 17th, we closed at 12,795.63
Today (24th, @ 10:11am) we are at 12,876.53
Short term abberations are standard, and no one can figure them out. If you are a long term investor, they shouldn’t matter.
I remember reading somewhere that during the crash of Black Monday when the markets lost around 20%, Warren Buffett was playing bridge at the time, and when informed of the market action, just kept on playing. I don’t know if that is a true story or not since I heard/read it many, many years ago, but sounds like him, doesn’t it? :)