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With the market off 5% over the past few weeks, this could be a good time to revisit our tolerance for risk. Those of us who periodically check total values of our retirement accounts have been experiencing a smug sense of satisfaction over the past three years. Our values- assuming if we have stayed the course in stocks and didn’t panic – have returned to the levels reached at the height of the 1990’s boom. The system has worked and we have been rewarded for our patience and staying power.

Now, however, we’re ten years older than we were in 1996 when the boom was just getting under way, and the thought of once again losing 35% --- a repeat of 2000 – 2002 results --- may be more than we want to contemplate. Instead of the abstract concept of percentage losses, think about dollars. How many actual dollars would you lose today if your assets shrank by 35%? Do you hear me now?

Moving toward retirement, we go from “leading lives of quiet desperation” to finally arriving at a place where we are standing, at least figuratively, in a shaft of sunlight without a care in the world. Going one step further would be the New Yorker cartoon depicting the two male angels sitting at a bar in heaven. One is saying, “You know, it’s always happy hour up here.”

The purpose of planning and saving for retirement is not to accumulate a pile of money. It’s to create what that pile of money can offer. For my late father-in-law, it was a world he appreciated with a life he described as “smooth.” There were no tough decisions, and he totally enjoyed himself from day to day through a well-deserved retirement period that stretched for almost thirty years.

If we’re reasonably on schedule to meet the financial needs of retirement, based on current asset values plus future contributions, this may be the time to consider some strategic moves. We may want to lock in current values with a portfolio allocation that would offer some reasonably predictable gains as we move forward. This would be a departure from the roller coaster ride that brought us to where we are today.

The record-breaking 10% annual gains in corporate profits over the past several years have translated directly into rising stock values, but there are clouds on the horizon. While corporations have more cash today than at any time in history, the question is whether or not consumers will have much to spend if interest costs on mortgages and debt continue to rise and the average person spends a minimum of $4,000 more per year on all fuel-related purchases --- everything from gasoline and heating oil to products made out of plastics. Then there’s the deficit, Iraq, Iran and a lack of any political will for fiscal leadership.

I can’t second-guess what might be the right thing for other readers in their fifties and sixties, but for those who might be curious, I will point out how my own asset allocation shapes up as it reflects my concerns. Today, I have roughly 65% of total assets in large value-oriented stocks (including one share of Berkshire Hathaway.) I have roughly 10% in a foreign stock mutual fund that is also a large-cap value fund. I still have 6% in an REIT fund which I have been systematically selling off over the years as it continued to outpace the rest of the market. The same is true with some small cap funds and some individual stocks. Finally, I have the rest of the funds in a combination of cash and Vanguard’s high yield bond fund.

In theory, this mix should earn an average of about 9% per year going forward and the downside should be limited to about 2% in a single year two-thirds of the time. In a doomsday situation, where the market loses as much as 24%, I should lose something more like 14% with this mix of investments. I can live with this.

Conversely, during a euphoric period when the market might be up as much as 44%, (expected about one out of twenty years) I can still expect to earn 34% with this mix. I still get to play in the sand box and gain some protection against inflation.

Over a ten-year period, I can expect to see my current holding increase by about 2.5 times their current value. There is a 10% chance that they could actually decline in value by 15% (the doomsday outcome) OR, there is a 10% chance that they might also increase to almost ten times their current value. Consistent with behavioral economics, I couldn’t care less about a ten times return, but I get concerned about the possibility of actually losing money over the next ten years. Anxiety about the downside trumps any euphoria when contemplating the possible upside. But again, I can live with the possibility of only a 10% chance of actually losing money. If the world goes to hell in a hand basket, I’ll be satisfied with 85% of what I have today.

But enough about me. Is your comfort level with risk consistent with the risk profile of your assets? Think about it.

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