Understand risk tolerance and how to stay the course during volatile markets

Many investors struggle with whether they should stay the course or adjust their asset allocation during retirement. Jonathan Kahler describes the importance of understanding your risk tolerance and staying the course during volatile markets. Jonathan also explains why market timing usually isn’t a profitable strategy.

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Other highlights from this webcast:

Gary Gamma: David from North Carolina writes, “Where can I find a framework or template for asset allocation?” I know we have an investor questionnaire in our Resource widget for the audience, but what else would you suggest there?

Jonathan Kahler: Yeah, and that’s a really great place to start. I think it really comes down to understanding what your tolerance for risk and volatility is in the portfolio and what your capacity is. So when we talk about risk tolerance, that’s really kind of what can you be comfortable with in terms of fluctuation. So if you see a market environment like we had maybe in 2008, early 2009 where we had equities really, really volatile, a pretty severe downturn, having an asset allocation that would make you comfortable in a situation like that, sticking through that time, and really allowing the portfolio to rebound without being too tempted to maybe sell out of those positions.

And then the capacity for risk. You know, if you have a long-term goal, you have maybe more capacity to take equity risk versus if you have an expense that you know is going to be coming up in the next few years where you may want to take less risk there. It would also depend on what the ultimate goal of the portfolio is. If you’re using the portfolio to generate that steady income for more predictable yearly expenses, you probably want to have a different asset allocation, a more conservative asset allocation compared to a situation where you’re trying to maximize wealth for a possible bequest down the road.

Gary Gamma: I think we’re getting a lot of questions about Vanguard offering advice; and, again, in the Resource widget, there is a link in there which talks about our advice services.

I think building on the point you made about changing the asset allocation back in 2007/2008, Gilbert from Texas said, “Assuming your asset allocation is correct, is buy and hold a valid option? More and more financial folks are advising to get out of the market or reallocate during bear cycles.” So, obviously, we’re not going to sit at the table here and give advice; but what do you say to that?

Jonathan Kahler: Yeah, and I think what Gilbert’s really getting at there is the issue of market timing. Generally speaking, it’s something you’d want to steer folks away from. Our research and the research of many others suggests that market timing is usually not a profitable strategy. And if you think about it, in order to do that in a way that it enhances your portfolio value, you really have to be right twice. You have to know when to make the decision to get out of the market and then when to get back in. And that can be extraordinarily difficult to do.

Often when we see market reverse themselves from bear markets or corrections, they also often do so quite quickly. So even missing a short period in the market can have an outsized impact over long-term returns.

Important information

All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is not a guarantee of future results.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

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