How Strong Is Your Stomach?

The vast majority of the time, most investors are not terribly concerned with their risk tolerance. Typically, the CBOE Volatility Index (VIX), a measure of S&P 500 volatility, sits comfortably below 20 and financial markets exhibit a consistent upward trend. However, as 2020 can attest, markets don’t always behave this way. Earlier this year the VIX spiked to almost 83, while oil volatility jumped to 325, which is a few standard deviations from typical readings under 40. A recent piece by Christine Benz compares investors’ risk tolerance with their personal portfolios to the ability to withstand choppy waters and avoid sea sickness. Everyone is wired differently. However, Benz dives further into a nature vs. nurture view of risk tolerance. Are the experiences in one’s life a primary determinant of personal risk appetite? Has one navigated through a season where portfolio drawdowns have coincided with pain points in other areas of life? Benz argues one’s experiences heavily influence their personal risk tolerance. At Viewpoint, risk is something that we are constantly researching, as indicated by our recent blog series by Portfolio Manager, Amin Haji. One’s ability and willingness to tolerate risk can be viewed on a spectrum with a myriad of factors contributing to finding the optimal point, thus influencing both present and future portfolio decisions.