DIY Investor Magazine
/
March 2017
24
Even the most carefully constructed portfolio will be
side-swiped by extreme market conditions; a 50:50
portfolio of UK equities and bonds went down by 58%
in 1973 and 1974 and no increase in the proportion of
government bonds was ever going to plug that gap.
Risk tolerance also changes over time and particularly
as the investor looks for more certainty as they
approach, or are in, retirement when they have more to
lose, and less time to make up any losses they incur.
It is important to remember the emotions of a big loss or
the euphoria of a continued purple-patch and aim for an
asset allocation that makes the former feel less onerous
and the latter all the more joyous; but neither out of the
ordinary.
Once at peace with your attitude to risk, it is important
not to let circumstances knock you off course; chasing
losses by opting for riskier investments is a sure fire way
to undo a lot of hard work – particularly when you are
closing in on your goal.
As you near the finish line, reducing the equity portion
of your portfolio will reduce your risk and if you need
all of your capital back within the next five years then
you probably shouldn’t be in equities at all; another rule
of thumb is that equities could lose half of their value
at any time, so see what such a loss would do to your
projections.
Regardless of your certainty that your risk assessment
is accurate, re-visit it over time, and be sure to do
so where you have signed up to a platform that has
no provision to change your asset allocation as
circumstances and attitudes change.
If your appetite to risk is correctly assessed and your
asset allocation is in tune with it, your investments
should give you no sleepless nights – DIY investing is
about accumulating and managing wealth over a long
time horizon; it is not about punting on binary options,
currently the bête noire of the money pages.
Because it’s a marathon and not a sprint, if your risk
assessed portfolio is well constructed, you should
be able to resist the temptation to sell cheaply when
markets inevitably nose-dive and be ready to capitalise
when the correction comes along.
