I'm having trouble connecting my intuitive sense of my risk tolerance with the tpaw results.
Here is an overall summary of my situation:
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Using TPAW's default risk tolerance of 12 (RRA=3.05), I end up with a recommendation for 17% of my portfolio allocated to stocks, varying 12-19% over time. If my algebra is correct, this amounts to about about a 27% stock allocation for my overall Discretionary portfolio ("General Spending"). ( ~27% * 1,436,638 = 17% * 2,242,441).
I run into trouble jiving this 27% with my intuitive sense of risk. Given I have all of my essential spending covered with "safe" bonds + future income stream, my intuitive sense says a typical risk for the discretionary remainder should result in a 40%-60% stock allocation, or even higher. (After all, 60/40 is the typically touted baseline for one's entire portfolio--not just the discretionary portion.)
But to get this 50% allocation on the discretionary portfolio (ie, 32% of my savings portfolio) requires I move the risk sliders to 16 (RRA=1.67). In other words, an aggressive/very aggressive risk tolerance.
Is my algebra incorrect, am I misunderstanding the fundamental concepts, or is my risk aversion simply lower than typical person?
Here is an overall summary of my situation:
Using TPAW's default risk tolerance of 12 (RRA=3.05), I end up with a recommendation for 17% of my portfolio allocated to stocks, varying 12-19% over time. If my algebra is correct, this amounts to about about a 27% stock allocation for my overall Discretionary portfolio ("General Spending"). ( ~27% * 1,436,638 = 17% * 2,242,441).
I run into trouble jiving this 27% with my intuitive sense of risk. Given I have all of my essential spending covered with "safe" bonds + future income stream, my intuitive sense says a typical risk for the discretionary remainder should result in a 40%-60% stock allocation, or even higher. (After all, 60/40 is the typically touted baseline for one's entire portfolio--not just the discretionary portion.)
But to get this 50% allocation on the discretionary portfolio (ie, 32% of my savings portfolio) requires I move the risk sliders to 16 (RRA=1.67). In other words, an aggressive/very aggressive risk tolerance.
Is my algebra incorrect, am I misunderstanding the fundamental concepts, or is my risk aversion simply lower than typical person?
Statistics: Posted by jmk — Sun Jul 07, 2024 10:02 am — Replies 834 — Views 233568