After reviewing my analysis on a conversation I had with a financial professional in 2013, I decided to take another close look at my finances. To my surprise, I uncovered a huge gap between my perceived risk tolerance and the reality of my portfolio.
Since leaving work in 2012, I’ve generally seen myself as a moderate-to-conservative investor. Without a steady paycheck, along with having a stay-at-home spouse and two young kids, I thought it prudent to be more conservative.
But after a thorough review of my largest tax-advantaged retirement account—my rollover IRA—I’ve come to realize I’ve been deluding myself for close to a decade. I am, in fact, an aggressive risk-taker, maybe even a risk addict!
I suspect your true investment risk profile is not what you think either. You're either more conservative or more aggressive an investor than you realize.
Diversify Into Real Estate
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A More Aggressive Investment Risk Profile Than I Thought
Here’s the breakdown of my rollover IRA. After leaving work in 2012, I wanted to invest in individual stocks in my 401(k), especially tech stocks, given my faith in the tech sector’s growth while living in San Francisco.
If you consider yourself a moderate-to-conservative investor, would you allocate 99.88% of your retirement portfolio to stocks? Probably not. 100% of the 36.55% I hold in ETFs is invested in equity-focused funds like VTI, QQQ, and IWM. At age 47, a more typical allocation might lean toward a balanced 60/40 split between stocks and bonds.
Likewise, a moderate-to-conservative investor probably wouldn’t put 63.33% of their portfolio into individual stocks. But I’ve concentrated a substantial portion in large tech names like Apple, Google, and Netflix, with additional weightings in Tesla, Microsoft, Amazon, and Meta.
It’s widely recognized that most active investors underperform compared to passive index strategies, yet my portfolio leans heavily into these individual positions out of faith, stubbornness, and inertia.
Stomaching Higher Volatility
No moderate-to-conservative investor would allocate 68% of their retirement portfolio to tech stocks, with the remainder in the S&P 500. The volatility of such a portfolio is intense. But I’ve been a proponent of growth stocks over dividend stocks since the beginning of Financial Samurai, and I like to do what I say.
If I were a financial advisor managing this portfolio for a client in my demographic, I might have been fired long ago—this allocation could easily have given my client a series of mini-heart attacks over the years.
Take the start of 2020, for example. From January 31 to March 31, the portfolio fell from $675,000 to $546,000, an almost 20% decline. Around mid-March 2020, amidst the fear, I published a post titled How To Predict The Stock Market Like Nostradamus, urging readers to hold steady and buy more. However, since this is a rollover IRA, I couldn’t add more funds to capitalize on the downturn, so money went into my taxable portfolios.
Then, between December 31, 2021, and June 30, 2022, the portfolio saw another steep drop, declining from $1,115,000 to $828,000—a 26% loss. As the dollar amount of losses grew, I began questioning the relentless effort to grind at work.
As I review my investment-related articles written during tough times, I notice many are crafted to provide psychological support—for both my readers and myself—to help us persevere through the lows.
Your Investor Mind is Playing Tricks on You
You are probably not as risky or conservative as you think. This financial blind spot can remain hidden for years, even decades, without an honest conversation with a trusted advisor or financial professional.
My parents and friends don’t have a full picture of how I invest our entire net worth; only my wife does. Even so, she doesn’t know our net worth allocation in precise detail. Like many couples, she leaves the investing to me and focuses on all the other tasks in our family.
Unfortunately, as your net worth grows more complex, so does the work required to manage it. This is why plenty of high net worth individuals offload their investment duties to someone else. They'd rather focus on the things they enjoy or are good at, and let someone else deal with all the nuances.
Why Your Investments May Not Align With Your Risk Tolerance
Let's review five reasons why your investment portfolio may be misaligned with your risk tolerance.
1) Asset Drift Over Time
Without regular financial checkups, your asset allocation is likely to shift over time. But your mind tends to anchor to the initial asset allocation for far too long. This type of anchoring is why junior employees often need to jump to a competitor to get paid because their bosses may always see them as newbies.
For instance, back in 2014, over 80% of my rollover IRA was in an index fund. Yet, due to tech stocks’ outperformance, that percentage has now dropped to 36.55%.
2) Misremembering What You Own Or What You've Done
Unless you keep meticulous records, you might forget what you invested in or sold. Over time, you may even misremember how much you actually made or lost. Revisionist history is a powerful coping mechanism to help deal with bad losses so you can continue investing.
How often do you think you have X amount in one position, only to find it's different? Did you really roll over your 401(k) to an IRA in 2012 and not trade much in the first several years? You are probably misremembering huge chunks of information like I am right now. My investment dashboard only goes back 10 years, so I might have rolled over the IRA in 2013 or 2014.
Watch the movie Memento to understand how one wrong memory can can compound to create an entirely new persona over time.
3) Becoming More Emotional During Downturns
It’s easy to feel like a winner when markets are strong. But when markets dip, emotions can flare, leading you to panic. Instead of seeing downturns as natural, there’s a tendency to extrapolate losses until it feels like you could lose everything.
Only after experiencing significant losses in at least two bear markets will you truly understand your risk tolerance. It’s all too easy to overestimate how much risk you’re comfortable with.
4) Being Overly Optimistic About the Future
If you’re like me, you like to look on the bright side in sub-optimal situations. But this optimism can lead to a more aggressive asset allocation than your financial reality can bear. When you lose money in your investments, your risk of a job loss also tends to increase.
You might be tempted to think, “If Sam is willing to go 99.88% in equities in his retirement portfolio, why shouldn’t I?” The simple reason: you’re not me. I would never take investment advice on a whim.
I treat my rollover IRA, 401(k), SEP IRA, and Solo 401(k) as “funny money” because they can’t be touched until 60. While I maximize contributions, my focus has been building an after-tax portfolio for financial independence. It is the taxable investments that generates useable passive income to help fund our lifestyle.
More info that may explain why you shouldn't invest like me:
- Growing Up Surrounded by Poverty: Growing up in Zambia and Malaysia in the late 70s and 80s, and later experiencing poverty in India left a profound impact on me. Seeing what life is like with little, I began to view financial gains as bonuses. With this perspective, I often treat money as if it’s not entirely real, making me more willing to risk it.
- A Tragic Lesson in Mortality: At 13, I lost a 15-year-old friend in a car accident. This loss made me feel as if every year I live beyond 15 is a bonus. With that perspective, I’ve felt compelled to go for it with almost every investment opportunity or otherwise.
- Constant Lottery Winnings: As a Gen Xer, I clearly remember life before the Internet. Never in my wildest dreams did I imagine being able to earn online income. As a result, almost all online income feels like house’s money, which mostly gets reinvested.
5) Being Overly Pessimistic About the Future
On the flip side, some people have a permanently pessimistic outlook on the future. Instead of evaluating situations objectively, they perceive a crisis around every corner—often rooted in past experiences or childhood traumas.
With this deep-seated pessimism, they may hold onto too much cash for too long for security reasons. Even when road traffic levels signal strong economic activity, they’ll consider it a fleeting illusion and shy away from purchasing a home. And even if the S&P 500 is up 25% one year, they’ll believe most investors are actually suffering.
While the pessimists will occasionally be right, over time, cash holders and short sellers are likely to underperform those who continue dollar-cost averaging through market cycles.
Know Your True Investing Risk Tolerance
Just like a fine mechanical watch needs yearly calibration to keep accurate time, your investments require regular adjustments to match your true investment risk profile.
Looking over my portfolio, it’s clear I’m an aggressive investor. I accept higher risks with the understanding that downturns will hit me like a boulder rolling down hill. But over time, I’ve come to accept these larger losses as part of the price of investing. I suffer from investing FOMO, the hardest type of FOMO to overcome.
It’s not just about aggressive equity allocations; my approach to real estate investing may be even more aggressive. From taking out a $1.2 million mortgage at 28 in late 2004 (on top of a $464,000 mortgage in 2003) to another large mortgage in mid-2020 amidst the pandemic, I’ve aggressively invested in almost every real estate opportunity that has come my way.
Selling some equities in 2023 to buy a new home in cash was my way of rebalancing risk. In hindsight, though, I should have leveraged even more, given how stocks continued to rise!
If you haven’t reviewed your investments thoroughly in the past year, chances are you’re not investing as conservatively or as aggressively as you believe. Do a deep dive this weekend or get a second opinion. I think you'll be surprised by what you uncover given the massive move in stocks since this year alone.
Taking On More Risk With Private AI Companies
Today, I find myself taking on more risk by investing in artificial intelligence companies. I’m optimistic about AI’s potential to boost work productivity. For example, I no longer need to expend my father or wife’s time to review my posts several times a week. That's 3-6 hours of time saved a week.
Yet, I’m also concerned about the impact AI will have on job opportunities for our children. In every neighborhood I move to, I see 20- and 30-somethings living with their parents because they struggle to find well-paying jobs. AI will only make securing good employment even harder in the future.
Given my lack of direct involvement in the AI field, investing in AI companies through an open-ended venture fund is the logical move. Much of my rollover IRA is invested in the same tech companies that passed on me in 2012 when I was applying for jobs to meet my unemployment benefit requirements. Now, I’m taking the same approach with AI.
If I can’t get hired by an AI company, then I’ll invest in them and let their employees work for me! Here’s to buying the next dip—for our financial futures and our children’s.
Investors, how well does your current portfolio reflect your risk tolerance? Do you think there’s a disconnect between how risk-loving or risk-averse you are and your actual investments? If your investments don’t align with your risk tolerance, what’s behind the inconsistency? And will you course-correct to better match your goals, or let your current strategy ride?
A Way To Invest In Private Growth Companies
Check out the Fundrise venture capital product, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the product is holding before deciding to invest and how much.
I've invested $156,276 in Fundrise Venture so far and Fundrise is a long-time sponsor of Financial Samurai. I plan to continue dollar-cost averaging into venture capital because I do believe AI is the future. I don't want my kids 20 years from now wondering why I didn't invest near the beginning.
Uncover Your Investment Risk Profile is a Financial Samurai original post. All rights reserved.
Tyson said it best…”Everyone has a plan until they get punched in the face.” 2008 rocked my portfolio over -25%, and it was simply more than I could handle psychologically. For me it was like I had just lost over 5yrs of extremely hard work, work I could never replicate again…..it takes youth to work 24/7 error free. I learned right then and there my ACTUAL risk tolerance. Ever since my entire net worth has climbed up and to the right at about a 35 degree angle. I should probably have a net worth at this point that is 20-30% higher based on S&P performance alone (I’m 50yo now), but I honestly don’t care. My take is, it is better to get rich and then STAY rich, then to take ANY additional risks to compromise your wealth. I see no difference in having say $8MM vs $11MM……your lifestyle stays exactly the same, you can handle almost any future problems, you can live anywhere you like, you can buy whatever cars or houses you want, and your not flying private anytime soon, so what is additional risk taking doing for your lifestyle at that point??….not much.
My life experiences thus far tell me that if you do get to $5MM, you had better get to $10MM to actually feel “rich”. And that the next real level of wealth does not even start until $25-$30MM+. So ask yourself…..how much work and effort does it take to get from $0-5MM….a ton. Then from $5MM to $10MM…..not near as much, and it happens pretty fast even if you play it safe. But to get from $10MM up to $20-$30MM takes another huge mountain of work and effort (or some very generous luck..). So my life observation is, make your $10MM and then protect it by any means necessary…..having $13MM wont change anything, but having $7MM sure will….crazy, but also true. Also age specific. I pulled the ripcord at 44yo and these levels more or less feel the same to me now as they did then.
“For me it was like I had just lost over 5yrs of extremely hard work, work I could never replicate again…..it takes youth to work 24/7 error free”
Very wise words. I felt the same way losing so much of my net worth in just 6 short months. For me, I got rocked by 35% of 40% and felt like I had wasted almost half my working career, saving and investing.
Yes, once you get rich past a certain level, the goal is to just stay rich. The trick is finding out how much is enough.
In my survey, the ideal net worth to retire ranges between $5 million and $10 million. I think that’s fair depending on whether you live in an expensive coastal city or not.
About a decade older than you. Started 3 part time different businesses back to back in 1993. Accumulated my 1st M at 30, my 2nd M at 32. Lost $5M in ‘01. Built back to $5M in ‘07. Lost $4.5M during that fun downtime (combo of lousy stock picking and an expensive divorce) but still was in my VERY early 40s, so I didn’t panic. Took me a LOT longer to get back to $2M cos now I was gun (and woman) shy. Remarried at 44, been married to the same wonderful woman, who was naturally more risk averse than me and helped curb my expensive habits. Now much happier with a lot less in expenses, a decent net worth, no kids and a few generous annuities. And permission from Sam to retire whenever we want to (thank you Sam!).
My 2 cents: Your comment about the amount of work to get from A to Ax2 or 4 resonates so well. And it’s easier to stay rich than to rebuild. You’re a better person than I am for realizing this earlier in your life than I did. Where were you when I needed you!!
I’m generally risk-averse, but I also experience FOMO so I have two separate taxable investment accounts. One account is for safer investments — index funds, individual blue chip stocks, etc., and the performance tends to stay within -/+ 5% of the SPY.
The other account is for riskier plays. Bitcoin. Meme stocks. Options. Anything speculative. Currently this account is crushing it compared to my other account, but this wasn’t the case last year.
In any case, this really helps me satisfy my FOMO while being true to my risk tolerance.
Btw, Sam, have you written about Bitcoin in the past? I think I remember reading a post or two regarding Bitcoin, but I’m curious to know your thoughts.
That’s a great solution to overcoming investing FOMO. I also have a “punt portfolio” where I’m constantly investing in the most speculative investments to see what hits.
I haven’t written about Bitcoin because it’s beyond my expertise. Obviously, the asset class has done well and I do have some Bitcoin related assets, but they are a small percentage of my investable assets.
I’m having a hard time overcoming the use case for Bitcoin – mainly shady activity.
Use case for Bitcoin is protection against inflation because there are only going to be a maximum 21 million ever and many are already lost. It’s also a diversifier to some degree. It’s not that useful as a medium of exchange. Other crypto works better there. Currently 11% of my net worth in Bitcoin and another 4-5% in a crypto company (Defi Technologies). The size of my bitcoin just overtook my gold holding (both in ETFs). I had gotten relatively conservative after increasing my net worth to about USD 4 million but only got a 5% return in 2023 and so decided to take a bit more risk. This year I could hit a 20% return unless things turn bad in the last 1.5 months.
Correct me if I’m wrong, but I look at investing this way,
1. The market is not required to give me a positive return on my investment
2. The market is not required to give me my principal back
3. One investor’s gain is another investor’s loss
I then invest/risk according to what I can afford to lose without a major disruption to my day-to-day routine.
Seems like a good and realistic attitude to me. Have you found your investments actually align with your investment risk profile?
I had some mental health issues a few years ago and was seeing a psychiatrist. As the stock market kept rising I would feel sick having most of my money in conservative fixed income and not making the big returns. I asked him why I was so ultraconservative on investing. He said that people’s brains are hard wired when it comes to taking on risk. That made sense to me.
hi Steve, hardwired in terms of what? A predisposition for risk aversion?
I think he meant that people are hardwired meaning predisposed to either taking on more risk verses people who don’t take on much risk. I watch people around me and that people who take on more risk have a tendency to be bigger gamblers like betting and going to casinos more etc.
It is very difficult for me to invest in the S&P 500 when it has reached 6,000. For 3 years I hoped for a greather than 20% drawdown to really jump back in. Of course, that buying opportunity never materialized. I am irritated with my pivot into dividend payers and treasury bonds, slowly watching my conservative portfolio not keep up with the Nvidias of the world. What I have learned is that when the money printer is cranking out cash it has to go somewhere. The most ridiculously overpriced, hard to value assets seem to be where that money goes first. TINA (there is no alternative) investing remains alive and well for the forseeable future.
The S&P 500 was down 20% in 2022. We had a good opportunity to buy the dip. But yes, when it comes to investing, everything is relative.
In a bull market, I try to be greedier when others are greedy. But sometimes, the results blow up in our faces.
But surely, your happy your investments are up though right?
Yes, I am happy that my investments have increased. And there will be future growth opportunites in the stock market. Perhaps a renewed period of IPOs is coming.
The surprising market cap growth that happened during Covid-19, all at the end of an already great 15 year bull market. I am simply a little miffed at myself for missing some of those returns!
I also believe there will be more initial public offerings over the next four years as well. As a result, I am more aggressively investing in private companies before they go public at likely higher valuations.
The more educated you become in investing, the better investor you will become. It has been shown through back testing that dollar cost averaging into the market outperforms saving cash and then buying the dip with a bolus of money. Here is one such article (sorry if this is bad form Sam), ofdollarsanddata.com/why-buying-the-dip-is-a-terrible-investment-strategy/. When the S&P is X in Y years, are you still going to be saying “it is very difficult for me to invest when xyx …”. Just invest, and keep investing at regular intervals regardless of what the market is doing. Let market history and math soothe your nerves and prognostications. Don’t try to overthink it, or in the long term, the market will leave you in the dust.
I totally know what you mean about having one perception about your holdings and finding out how that actually differs from reality. I recently had this revelation due to your reason #1 Asset Drift. I thought my retirement allocation was right around 60/40 but it drifted up to 70/30. I was a bit jolted by this realization and felt temporarily exposed to too much risk. But after mulling things over, I’m okay with it for the short term. Nevertheless it’s a good reminder for me to not just look at my portfolio’s performance, but to pay more attention to the drift of the allocation. And thus be more mindful about where I allocate new contributions.
See chart below (or above?) – not sure how it will format one pasted :)
Well, your allocation is going in the right direction! Let your percentage in stocks continue drift upwards from 60/40. Based on SWR, back testing shows 75/25 and 100/0 stock/bond allocation outperforms 60/40 over 30 to 60 year retirement. The longer your retirement period is, the better you will do with a greater percentage of stocks in your portfolio.
There are a lot of reasons I totally disagree with this chart. This thing had to be produced by somebody in the stock selling business.
I believe the point was to illustrate the cost of inflation upon your “safe withdrawal rate” over time. However, the % in stocks is totally irrelevant and implies a cause and effect that is simply not there. The after tax total return of the portfolio is what is relevant, regardless of the asset class(es) used to generate those returns (so stocks, bonds, cash, real estate, gold, crypto, comic books, fine art, wine, whatever…)
Here is my really simple version…..start with $10,000,000 worth of mixed assets, live 40 more years (480 months). So $10MM/480 = a spend of $20,833/month, every single month, for 40 straight years (never saving even one dollar), to then die with zero dollars. Cool, forget your heirs. This would be a 2.50% permanent withdrawal rate, but with a 0.00% return over all 40yrs combined with maximum spending all 40 years. Sure inflation is crushing your buying power, eventually…but your odds of having over $20k/month to spend the whole time is 100%….which is probably better than your odds of living 40 more years. So…
This table says if you spend 4.00% for 40yrs with 0% stocks that you only have a 33% chance of success. GET SERIOUS!! We already know we can get 40yrs with 0% returns with 100% success rate, but with decreasing purchasing power. Today you can easily earn over a 6%+ taxable equivalent yield in AA+ muni bonds and there are zero stocks required, and no taxes due. Mix in a little gold, real estate, or TIPS specifically for the inflation protection and you are good to go…..FOREVER!
I mean no disrespect but your argument is based on your “feelings” and a poor anecdote. How many people are starting their retirement with 10M, let alone 1M? By historical measures, inflation eats away at many asset classes, but not stocks. The chart above was based on mathematical analysis and back testing of actual stock market results, not “feelings”. It can be viewed and explained in much greater detail her earlyretirementnow.com/safe-withdrawal-rate-series/. I would recommend everyone interested in early retirement read it.
Investing has changed so much over the years with the advent of online brokerages and Vanguard. Investing in the SPY or VTI is almost considered “conservative” now. Individual stocks are only really thought of has risky in the “stock” realm.
My financial advisor plans to have me in 80% stocks (Mutual funds) for life. I don’t see a problem with that.
Even in the most ahistorical and dark scenario of the next 10 years only returns 4% on average a year, will bonds really do that much better?
80% in actively run mutual funds? What are the fees on those?
Yes, when I don’t know what to invest in, I just invest in the S&P 500 more total stock market index.