The equity markets continue their favorable performance 5 years into the bull run, notwithstanding the occasional blip here and there. Some of us may have been lulled into riding the momentum, thereby making no changes in portfolio allocations or holdings. After all, we want our portfolio to continue growing and propelling us toward our financial goals, right?
Yet there are a couple of critical factors present here — our risk tolerance and our risk capacity. Risk tolerance reflects our comfort level, or appetite, with holding certain types and amounts of specific investments.
Risk capacity, on the other hand, reflects the degree to which we can hold certain types and amounts of investments without overly exposing the portfolio’s potential for helping achieve our financial goals. In other words, it reflects a realistic measure of the size of a potential loss in portfolio value that an individual or family might withstand without significantly jeopardizing the ability to reach their financial goals.
Of course risk tolerance and risk capacity vary at different times over our lives. They are probably much larger during our early work years versus just a couple of years before retirement.
However a shift in the portfolio’s allocations may also be appropriate at an earlier time, as an example, such as at age 50, especially if that person’s portfolio has achieved sizeable gains over this past bull run. Sizeable gains may provide the perfect opportunity for locking in gains achieved, by selling a portion of the current stellar-performing holdings and re-investing those proceeds into holdings which may not have enjoyed the same degree of favorable performance.
That action just described is exactly what happens when we strive to sell high and buy low.
So it gives all of us something to think about. Do you wish to stay the course regardless, thinking that you will be able to identify the time when the market turns and then shift your holdings accordingly at that time? Or are you more comfortable following the age-old wisdom of buying low and selling high?
Which course is right for you? Will you continue following the momentum? Or will you give the nod toward being realistic?