March 26, 2012: A Few Good Sources To Help On Deciding Risk Profiles

03/26/2012 Share 0 comments

Re-balance Cycle Reminder

Based on our new monthly re-balance calendar, the next re-balance time will be on Monday, April 23, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Where To Find Help On Deciding Risk Profiles

In our previous newsletter March 12, 2012: Setting The Right Risk Profile, we discussed the importance of setting the right risk profile for your portfolios. A natural question arises from this topic is where to find help on this.

There are many online websites that help this. Before you try one of them, you need to distinguish a personal risk profile for retirement and a risk profile for a specific portfolio as we mentioned in the previous newsletter. The former is a risk profile that is for your overall investment needs, mostly for your retirement planning purpose. The latter is for a chunk of money that you set aside for some specific needs such as a child's college education in 6 years or repaying your loan in 3 years.

MyPlanIQ offers a simple way to help decide your personal risk profile for retirement purpose. In fact, our method is very similar to that offered by Fidelity Freedom Target Date Funds. These target date funds are designed for retirement portfolios.

On the other hand, Vanguard offers three different approaches:

• Vanguard Target Retirement Funds: for retirement purpose
  
• Vanguard LifeStrategy® Funds: for specific events
• Vanguard Managed Payout Funds: for in retirement or cash withdrawal purpose

Vanguard offers a specific tool to help you to build a portfolio, along the way, it helps to find out your risk profile for this portfolio. You can access their link Get a mutual fund recommendation. It asks you 3 questions: Time line, risk and income. Both risk and income questions are trying to help find your actual risk tolerance. For example, if you are absolutely sure you want to use this amount of money in 5 years, you want to answer these two questions in very conservative ways. 

Finally, once a portfolio is presented, you can figure out your risk profile by simply looking at the fixed income (bond)'s allocation(s).

We like Vanguard's approach as the three aspects it uses are very critical to pinpoint a risk profile for a portfolio.

Schwab also offers a questionnaire for its client (you have to login to access to the link: risk profile questionnaire). However, we believe its answer is overly optimistic. Somehow, it tries to serve both purposes.

Other sources such as TIAA-CREF, ING and many annuity and insurance companies also offer similar questionnaires to help you to decide a risk profile. Ultimately, the most important part is that you need to look at both your overall situation and specific needs to get a better answer on this.

Portfolio Reviews

The following is the performance of the five tactical portfolios on our Featured ETF plans page:

Portfolio Performance Comparison (as of 3/23/2011)

More detailed comparison>>

As a reminder, the comparison link is also listed on our ETF,Mutual Fund Portfolios page.

Market Reviews

S&P had its "worst" loss last week. Even though it is the 'worst', its loss is extremely muted (VTI lost -0.48% for the week). CBOE VIX has dropped to about 14.8%, indicating a goldilock scenario in such an uncertain macro environment.

For now, all risk assets are ranked above the total bond index (BND), with commodities sitting at the bottom among these risk assets. All of our allocations are well positioned to take advantage of further strength if there is any.

See major asset trend table on 360° Market Overview for more details.

However, we would like to emphasize the high risk in stock markets again here. For new investors, we repeat that it is important to adopt gradual exposure to risk assets using strategies suh as dollar cost averaging.

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