Portfolio vs Risk Tolerance

After the big moves in January and February, I thought it would be a good time to look at my portfolio and how it performed. This seems to be a good practice to me. It comes down to the question of risk tolerance. Is my portfolio in line with what my stomach can support?

AI201602

Looking back at the start of the year, There was actually little drawdown in my portfolio.Compared to the general market dropping up to 10 pct, my drawdown was less.

 

 

What could explain this?

A first reason is that I look only once at my portfolio. and I look the first day of the month. The max drawdown of the market in January was on Jan 20 and Feb 11. 2 days that I have no formal record of my portfolio value.

A second reason is to be found in my asset allocation. Lets have a close detailed look.

Portfolio201602_org

The graph tells me the following

  • Roughly 37pct (the brownish) is invested in assets that do not care about market moves. A market move of 10 pct will give me only 6,3 pct drawdown. This is good. On the downside, a market uptake of 10 pct will only increase my portfolio with 6,3 pct. Off course, this is the goal of these elements in my portfolio.
  • The core part of my portfolio is also not 100 pct in stocks. These are my mutual funds that I hold for their power to survive market crashes. Or at least, so they did in 2008/2009.

So, to make a summary, for the time being, I am in a 50/50 pct portfolio.

Attention points

IMG_8116_7_8With a portfolio like this, I have less volatility than the market. This is a two edged sword. There is less downside swing. Less upward swing also. This means it is more difficult for my portfolio to have a long term return that will bring FIRE closer.

 

 

With the current plan in place, all my contributions will go my lazy index portfolio. As such, my exposure to higher risk asset will increase. If the past is a good indication for the future, this should result in a higher expected return as well.

How did your portfolio do during the first 2 months of the year?

Advertisements

7 thoughts on “Portfolio vs Risk Tolerance

  1. That looks like a steady portfolio to me. Ours dropped a little less than the US market, about 7% at the worst, but has sprung back since. We are underweight stocks right now and are hording cash, not that I’d recommend my approach to anyone else. I hope you’re having a great weekend!
    -Bryan

    Like

  2. Hi ambertreeleaves,

    Are the mutual funds you hold a mixture of stocks / bonds, or are they all stocks? It’s probably worth calculating the actual percentage of stocks vs bonds in determining your risk tolerance…the largest drop in annual return for a 100% US stock portfolio was -44% since 1928; the best annual return being +53%. So a 10% drop is significant but could have been much worse.

    I think for the year to date as of yesterday, my Income Fund is finally back in positive territory (0.31% as of 4th Mar); having fallen to a low of -3.9% on 12-Feb. Still a long ways to go for the month end though!

    Best wishes,
    – DL

    Like

    1. For now, I have the feeling my return is lower than the market. That is fine, as I assume less than market return in my calculation.
      Over time, I will become more aggressive. I will try to nock of a few years from the 2029 goal.

      Like

  3. Everything looks good to me. Having less downside and upside is not necessarily a bad thing. For me, it’s all about sleeping at night. If a portfolio is so risky that every morning I need to check my stocks to see how much I’ve lost, then I need to re-evaluate my positions.

    Like

    1. That is my main concern as well: sleep at night. Reaching my FIRE goal in due time is secondary to that. When calculating the date, I took a fairly conservative estimate, one that should correspond to my current portfolio.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s