What are some of the similarities and differences you’ve noticed in how couples approach money?In my experience, couples often have a similar approach to their finances. Many of my clients and their partners share the same values—they agree on financial goals, how to achieve them, and even how they approach the somewhat elusive concept of wealth.
Where I see a difference is risk tolerance. It seems that the spouse who takes the lead in financial planning, and consequently has more experience (and more confidence with the process), is often more comfortable with risk. The experienced spouse has seen the impact of market turbulence, survived it, and understands the importance of maintaining a long-term perspective. A less-experienced spouse may not know what to expect and is therefore less willing to take on risk, especially in periods of market volatility.
One thing that’s interesting to point out is that conservative investors are generally more sensitive to market volatility, even though they have less to lose (in other words, lower-risk asset allocations). Their concern about volatility isn’t proportional to the probable impact of volatility on their portfolio.
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How can two people choose an asset allocation they’re both comfortable with if they have different feelings about risk?Start with understanding your overall goals and time frame. As a couple, what’s your financial strategy? For example, do you want to maintain a portfolio that you can withdraw 4% from each year throughout retirement, or are you focused on accumulating wealth?
Once you’ve narrowed down your goals, talk about hypothetical asset allocations. For example, if you held 70% stocks, 25% bonds, and 5% cash for 15 years (from 2000–2014), your portfolio would’ve fluctuated by over +23% in 2003 and almost –25% in 2008.
During that same time frame, if you held a more conservative asset allocation (30% stocks, 65% bonds, and 5% cash), your portfolio would’ve fluctuated by over +12% in 2003 (and 2009) and almost –8% in 2008. (Keep in mind that while an 8%, rather than a 25%, dip in your portfolio’s value may sound pretty good, every asset type has risk.)
There’s a great tool on vanguard.com that uses real historical data to demonstrate that your asset mix controls how a portfolio’s value is impacted by market volatility.
Once you find an asset allocation that both of you feel comfortable with, you can face economic headlines with confidence. You’ll know what to expect—you can say, “Our portfolio’s value may fluctuate, but if we stay the course, we should meet our financial goals—regardless of day-to-day moves and market headlines.”
If two people don’t have the same “gut reaction” to market volatility, how can they keep their joint portfolio on track during market swings?More-conservative investors are naturally more likely to want to pull back when markets are volatile. On the flip side, investors who are very tolerant of risk may see market drops as an opportunity to buy more.
But regardless of how each individual wants to react to market volatility, I encourage them to take a disciplined approach: Take a step back, reevaluate your financial strategy, talk about your situation, review your goals, and discuss your time horizon.
If nothing has changed, we recommend that you maintain your target asset allocation. After all, your target asset allocation was chosen with careful regard for how it would react to market fluctuations (and to give you the best chance of success).
How does being near to retirement—or even in retirement—factor into how a couple approaches market volatility?Retirement is a life event, but it’s also a phase of life—and hopefully a long one! We encourage most clients to plan for a retirement that spans 20–30 years or more. The day you retire isn’t the day you stop planning for your financial future.
If you’re concerned with how market movement could potentially impact your portfolio—especially if you’re relying on your portfolio as a primary income source in retirement—it may make sense to set up a money market account. Having money to cover your living expenses for 6–12 months will give you peace of mind that your assets are easy to access and will retain their value. A low-risk account can provide you with a large enough safety net so you don’t lose sleep when the markets are on the move.
How important is “financial compatibility”?It’s not about what’s in your bank account, it’s about your philosophy on money. How do you approach the future? What are your long-term goals?
Of course, I encourage couples who are just starting out to talk about moneybefore things get serious. Provide full disclosure: Discuss what’s important to you in the future and where you are right now.
Although “financial compatibility” is important in theory, I think it’s about more than that—it’s about compatibility in general. Chances are, if two people are on the same page about the kind of lifestyle they want—and what they’re doing right now to work toward (or maintain) that lifestyle—they’ll probably be on the same page about money matters.
The most important thing a couple needs when it comes to money is trust—trust that your partner is being open and honest about their finances and trust that your partner will respect your wishes.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance does not guarantee future results.
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 in a declining market.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.