Risk Tolerance

How many times have you read about risk tolerance? How often was the article to get you to buy more stocks? After all, wait long enough and stocks are best. It may take thirty years. But stocks will end up best…if you maintain a fixed allocation and if you are not making withdrawals.

Adjust allocations in accordance with valuations (e.g., P/E10 or the market’s dividend yield) and everything changes. Your risk goes down, way down, compared to sticking with a fixed allocation.

Adjust allocation in accordance with valuations during retirement and you are way ahead. It adds a percentage point to your withdrawal rate (e.g., from 4% to 5%).

A fixed allocation is folly these days. A little time on the Scenario Surfer will put you far ahead of your fixed allocation peers. Moreover, you can learn the latest value of P/E10 by taking advantage of the Stock Returns Predictor. It shows the current relationship between the S&P500 level and P/E10.

Have fun.

John Walter Russell
April 21, 2008