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The 1983 movie “Risky Business” starring Tom Cruise came to mind recently when I heard the report that inclination to take risk is all about personality more than anything else. In the movie, the situation gets out of hand when parents leave town for a weekend leaving their high school senior with no adult supervision. Meanwhile, the party, including the Porsche plunging into Lake Michigan, turns out to be a success and everyone has a wonderful time --- except for a few misunderstandings.

When it comes to accepting risk in the management of retirement accounts, personality clearly plays a leading role. Popular formulas and investments like target date mutual funds tend to shift assets toward bonds as investors’ ages march toward a hypothetical retirement age. For most people, those products and formulas amount to a huge disservice. For starters, all of them have typically ten percent of the money in bonds even for people barely older than the “Risky Business” party-goers. Generally speaking, today’s most popular 401(k) investment tool makes no sense for most people. Target date mutual funds only benefit the financial institutions that get paid a lot for little value added.

Risk inclinations dictated by personality can be quantified to some extent. Here are some sample questions on which to rate yourself on a scale of one to five (with 1 being strongly disagree and 5 being strongly agree): A total score will determine if you are a conservative, moderate or aggressive investor. First question: Will I risk short term loss for higher long term gain? 2.) Is gaining higher long term returns to outpace inflation my most important objective? 3.) Can I tolerate sharp up and down swings in value in exchange for higher long term returns? 4.) Do I expect to start withdrawing retirement income within the next five years?

Part Two of the same quiz asks two questions: First, how many years before I expect to take distributions from my retirement account? And second, how many years until I retire? The time periods for answering these two questions are as follows: rate the time periods from one to five as follows: 1 is zero to 4 years; 2 is 5 to 9 years; 3 is 10 to 14 years; 4 is 15 to 19 years and 5 is 20 years or longer. The subtle difference between these two questions addresses the situation whereby someone decides to live on other savings or the profits from residential downsizing before they actually start living on income from their retirement account.

A total score of from 6 to 14 on all six questions indicates that you are a conservative investor. 15 to 22 pegs you as moderate and 23 to 30 would label you as an aggressive investor. The conservative investor should have about 50 percent of assets in bonds in the rest in large, dividend-paying stocks. The aggressive person should have everything in stocks.

While a test like this may seem a little too basic for most sophisticated investors, it’s worth considering how you actually felt during or responded during the 2008-2009 crash. Did you just shrug it off like an aggressive investor? On the other hand, did you have your fires banked at the time (with some bond or balanced mutual funds) so that you didn't have to lose sleep during that plunge? If so, has it since bothered you that you haven’t fully participated in the 200 percent rise in market values since the bottom of the market in ’09?

I will confess that while I stayed mostly invested in equities during that downdraft, I had my doubts about where things were going around February of 2009. While I was conscious of the “snapback” effect following the seven previous crashes since 1970, I found myself having to fight the possibility that “this time it’s different.”

Meanwhile, for those who are curious, I checked “5” on the first four questions, and “3” on the last two (retiring or at least slowing down in ten years at age 80) for a total score of 26. I’m mostly in stock mutual funds, but with those holding large companies that pay dividends. Home equity satisfies most of what I view as a bond portfolio requirement. As for the prospect of some catastrophic economic collapse, I’m comforted by Warren Buffett’s observation that since 1900 we've had countless economic crashes and several major wars. During that time, the Dow has risen from 50 to its most recent all-time high of over 18,000. There’s a resilience to human endeavor and we can be eternally thankful for that.

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