Updated: Jul 27
You likely don’t have just one risk tolerance; you have several. Our approach to solving for risk is to develop a composite of different risk tolerance worksheets. The goal of this ‘mosaic’ is to develop a personalized risk tolerance. Using this simple step-by-step exercise, you will now have a tailored investment philosophy that supports, synergizes, strengthens, and ultimately maximizes your overall financial planning masterpiece.
Step1: Assemble Your Investment Toolset & Inventory
Select a risk tolerance questionnaire
Create a checklist of existing asset classes and their current percentages
Obtain all available investment options in your employer’s retirement plan
Have a family “team” mentality, leverage each other's strengths, and offset each other's weaknesses. Listen and be respectful of feelings towrd risk.
Step 2: Refuse, Reuse, Recycle
Repurpose existing strategies
Coordinate asset classes in your employer’s plan(s)
Identify any missing asset classes and reject overlap
Proper asset allocation isn't done well just by looking at historical returns. There are several variables to consider. Furthermore, keeping investments that are working well for you is part of an objective planning process. This is despite your personal feelings toward the company or advisor that sold them.
Step 3: Compartmentalize Your Money
Complete a risk tolerance questionnaire for each of your Short-Term, Medium-Term, and Long-Term dollars
Focus on the specific objective of each ‘pot of money’
Understand that no one company can do everything for you
Highly effective strategies can be very simple
Depending on if the money is 100% taxable, partially taxable, or 100% tax-free, the money will have inherent strengths and weaknesses. Embrace these and try to enhance their benefits and features to suit your planning. Consider the core functions, your personal accessibility requirements, and how the money naturally enjoys being treated from a tax and income perspective.
Step 4: Reassemble Your Strategy
Consider your total income, tax and liquidity requirements
Consider any guaranteed-like offsets to reduce “withdrawal pressure” (i.e. Social Security, pension, annuity, or Real Estate income)
Identify new opportunities for efficiency
Don’t take risk just for risk's sake. Take risk when you can afford to do so and the chances of making money are worthwhile and likely. Know when to say when.
Step 5: Implement
Consider your deployment timing (i.e. Dollar Cost Average)
Confirm and coordinate your risk tolerance with your spouse (and all affected parties)
In general, I suggest listening to those people who have collected all the data and emersed themselves in your financial situation. Financial representatives, family, and professionals may have knowledge and experience, but sound advice requires the whole picture. However, do embrace the various 'micro-managers' for their specific skillsets, but remember ultimately you’re the boss and should know what's best. Afterall it's your money not anyone elses, right?
Step 6: Commitment & Reinforcement
Strive solely for “educated” decisions
Own up to your decisions; learn from mistakes
Get fiduciary advice as needed
Always consider what I call the 'long-game' and the 'short-game.' The short game is what things look right now. What does your gut say? The 'long-game' is the big picture. Ask yourself... How can these sometimes diametricly opposing forces somehow correlate? No one is able to really 'time the market,' but sometimes it's easier to make a judgement call than others.
Step 7: Repetition
Be skeptical of fact-less advice, and make changes sparingly
Immediately investigate outside changes to variables
Develop a habit of quarterly rebalancing check-ins
Putting together an effective risk tolerance strategy doesn’t take much, just diligence. I always say it isn't rocket science its “habitual” science or the art of just doing.
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