"The asset-allocation tools you'll find online or that an adviser will employ when working with you routinely recommend stock allocations of 70% or more if you're younger than 55 or so. Target-date retirement funds that are the default investments in most 401(k) plans similarly have high stock concentrations, as do planner recommendations you'll typically see in the pages of Money. That's because, over the long run, stocks return more than bonds, so odds are (notwithstanding the past decade's lousy returns) that a heavier stock allocation will give you more money in the end.They even have a section that can be used for classes. I think I will do it next semester.
Rational, yes. But some of the best work done in the study of risk tolerance concludes that many people can't handle the swings that come with such big stock weightings. As a result, they'll frequently sell at or near market bottoms.
FinaMetrica, an Australian company that has developed a respected risk questionnaire used more than 250,000 times by financial planners, has found that only 7% of investors can stand to have more than 75% of their total investments in stock, and only 1% can handle more than 87%. 'The investment industry tends to encourage people to take on more risk than they're emotionally equipped to handle,' says FinaMetrica co-founder Geoff Davey."
Friday, October 09, 2009
New ways of measuring market risk tolerance - Yahoo! Finance: