Comments on: Risk Tolerance Metric: Loss to Income Ratio http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Pelon http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html/comment-page-1#comment-1211 Pelon Tue, 09 Dec 2008 00:50:29 +0000 http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html#comment-1211 That's a useful measure, but it is not without its difficulties. It is skewed by really small or really large portfolios or really large or really small incomes. It also doesn't measure the opportunity cost of investing in a low risk portfolio. Losing six years worth of salary is bad, but if you have to give up ten years worth of gain to avoid that loss, you are worse off. Still, it is a lot more effective than simply listing a percentage, and it should work reasonably well for people within ten years of retirement. That's a useful measure, but it is not without its difficulties. It is skewed by really small or really large portfolios or really large or really small incomes. It also doesn't measure the opportunity cost of investing in a low risk portfolio. Losing six years worth of salary is bad, but if you have to give up ten years worth of gain to avoid that loss, you are worse off. Still, it is a lot more effective than simply listing a percentage, and it should work reasonably well for people within ten years of retirement.

]]> By: TFB http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html/comment-page-1#comment-1200 TFB Fri, 05 Dec 2008 06:20:22 +0000 http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html#comment-1200 While I think the loss-to-income ratio puts the risk tolerance in better context than a simple percentage, I'm not suggesting where the line should be drawn. That has to be a personal decision. I think your loss of 4 months of salaries would be within my boundary of acceptable loss (when you talk about a combined portfolio, you have to use combined salaries). Even the prospect of losing one year of income might still be OK for me. But if it's going to be five years, I will definitely not take that kind of risk. I think this kind of self-discovery is helpful for constructing an asset allocation that's within one's risk tolerance. While I think the loss-to-income ratio puts the risk tolerance in better context than a simple percentage, I'm not suggesting where the line should be drawn. That has to be a personal decision. I think your loss of 4 months of salaries would be within my boundary of acceptable loss (when you talk about a combined portfolio, you have to use combined salaries). Even the prospect of losing one year of income might still be OK for me. But if it's going to be five years, I will definitely not take that kind of risk. I think this kind of self-discovery is helpful for constructing an asset allocation that's within one's risk tolerance.

]]> By: enonymous http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html/comment-page-1#comment-1199 enonymous Thu, 04 Dec 2008 17:46:02 +0000 http://thefinancebuff.com/2008/12/risk-tolerance-metric-loss-to-income-ratio.html#comment-1199 our loss has been 1/3 of our household income for the year (married couple) so that means that we lost 4 months of our combined salary (or 14 months of my wife's salary). that is with an 80/20 stock/bond portfolio yeah, it hurts, but as much as I like your loss/income, it seems that it would lead to essentially no risk taking with a larger portfolio for instance, if my portfolio becomes 10x larger (here's hoping!) then a 10% loss would equal one year of our combined income... yes, the need to take risk drops as wealth increases (in general), but does it drop that much? our loss has been 1/3 of our household income for the year (married couple)

so that means that we lost 4 months of our combined salary (or 14 months of my wife's salary).

that is with an 80/20 stock/bond portfolio

yeah, it hurts, but as much as I like your loss/income, it seems that it would lead to essentially no risk taking with a larger portfolio

for instance, if my portfolio becomes 10x larger (here's hoping!) then a 10% loss would equal one year of our combined income…

yes, the need to take risk drops as wealth increases (in general), but does it drop that much?

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