1. Choose your portfolio model by assessing your risk tolerance

OK, for you do-it-yourselfers or those allocating your own 401k’s, this is the first step in constructing your portfolio using our tools. You need to develop a feel for your risk tolerance, or your ability to handle the financial ups and downs the market will produce in your portfolio. Most brokers, advisors, and financial web sites have free online tools or questionnaires to help you assess your own risk tolerance, based on your investment time horizon and your financial situation. Feel free to look around at any of those free online tools.

For our purposes, once you have availed yourself of those other options, we want you to know how big a drop in your portfolio you can handle before you feel pressured to make some change. Making bad decisions under the pressure of losses is probably the second biggest reason people blow up their retirement accounts, so this risk assessment is important. The biggest reason people blow up their retirement accounts, in my view, is greedily or naively allocating too much of their portfolio to a hot stock, sector, mutual fund or asset class that has really been doing well for 2-3 years and is catching big news headlines as a result.

I’ll provide theoretical backtests that will give you some idea of how our six portfolio models might have done over a 5-6 year period. Note that the time frame of these backtests is from 2004 through late 2011. If you want access to backtests and charts current as of the prior week, feel free to subscribe to the PortfolioWisdom Mobile App. Please select the model portfolio (1-6) that best suits you based on the overall behavior of that portfolio over time (not only looking at which one ended with the most money). Look at how much each portfolio model lost during the crash of 2008 and during other market downturns. Look at how much each model portfolio lagged the stock market, when it was going straight up! Decide which model is the one that best balances your family’s desire to avoid big losses with your family’s desire to see nice gains when the market is rising. You will see that portfolio model 1 is the most conservative with the smallest drawdowns (and gains) and portfolio model 6 is the most aggressive with the biggest overall gains (and drawdowns). Most people would not be able to sleep very well at night if their entire retirement account was down 35%, as the aggressive portfolio might have been during the crash (stocks were down 50%). Update 1/13/2014 Models 1 and 2 have been discontinued because they were too conservative. Based on subscriber requests, a model 7 with no bonds was added (more aggressive than aggressive growth). So, for risk tolerance purposes, choose between models 4-6 below. So, look carefully at the portfolio drawdowns shown in the charts and the spreadsheet below before choosing your risk tolerance and portfolio model.


If you are a 401k investor, you can return to the previous page showing the asset allocation matrix.

If you are curious about our mobile app and or managing your own account, then go On to Step 2