Testing Your Risk Tolerance

If any traders’ proverb has been further from the truth this summer it is “Sell in May and go away.” It used to be that summer was a time where the stock, bond, and commodity markets didn’t do much because everyone was on vacation (either literally or figuratively). As we all know that sure hasn’t been the case this summer in large part due to the Debt Ceiling deadline of August 2nd. Combine that with the S&P 500 downgrade of our U.S. Government debt, add the European economic woes, and some lackluster U.S. economic reports and it’s no wonder no one had time to “go away”.

Individual investors are having their risk tolerance tested to the nth degree this summer. But, we would argue that that isn’t all bad. Sure, investors can pick a chart on a risk tolerance questionnaire that they feel they can withstand on the downside and enjoy on the upside. However, it is a whole lot different when the upside and downside is actually happening. It is more of a barometer of an investor’s true risk tolerance in a down market than in an up market. As another saying goes, “The pain of a loss is felt more acutely than the pleasure of a gain.”

The concept of asset allocation is not a new one but sure can get lost when markets seem to do nothing but go up (either stock or bond). At the beginning of the year investors were feeling more risk tolerant as the stock market took off. It is times like now when having the appropriate asset allocation to meet investment needs and objectives proves to be the best strategy for the long term. Couple asset allocation with having an investment advisor take the emotional element out and the individual investor should be sleeping better at night. No one can predict market gyrations with a 100% accuracy but one can try and build portfolios to withstand them.

We are always available to discuss your asset allocation.