I might be wrong, but I think it was Strategas Research Partners which coined the term, TINA, shorthand for There Is No Alternative…to stocks. Traditionally, the two main, competing asset classes are stocks and bonds, and in this two-asset class dichotomy, you could change Tina to TRINA, there really is no alternative.

Take a look at the inflation-adjusted yield on the 10-year Treasury note in the chart below. Investors in it, are likely to end up with less purchasing power than when they started. (Click the chart to be taken to the Axios story on this.)

With bonds traditionally the less volatile of the two asset classes—and U.S. Treasuries the world’s safest securities with respect to default risk—there are, admittedly, riskier and thus, higher-yielding bond types, but Treasuries anchor yields, and other bond types will only be slightly more attractive than Treasuries.

Regardless, this scenario forces investors to say there really is no alternative and, thus, I must invest elsewhere. Where can I invest, instead? The front cover of this week’s Barron’s magazine suggests some alternatives… “energy pipelines, dividend stocks, and real estate,” none of which have a risk profile anything like bonds.

Unfortunately, there is also no alternative to holding investments that match one’s risk profile, which is a subject we discuss in the blog post here.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Past performance is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

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Anyway, I encouraged him to get his investments in line with his willingness to accept risk now rather than trying to get out of the way of a nasty headlines later.

We have a tool that can help with that. Click the link below to find your risk number, then let us show you how your investments compare.

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Soon, we hope to publish a page on our website that allows you to find your risk number for yourself.  Until then, check out the Riskalyze post and see if you can figure out your investor personality type using their helpful graphic.  If you want to explore the personality testing phenomenon, we recommend the Enneagram.  Learn more about this method that explores your motivations for behavior and take the brief test here.

While you’re at it, here’s another post about risk that considers more than just risk tolerance.

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Here is a look at Morningstar’s fund flows from February. Notice that U.S. stocks are sold (red boxes) and what is bought (green boxes) are what’s done well, recently (foreign stocks) and what is less volatile (taxable bonds.)

Timing markets is extraordinarily difficult, and if you think you can do it, you might be suffering from the Dunning-Kruger effect, which is a cognitive bias—deficiency is more appropriate—where “people of low ability suffer from illusory superiority.

We think a far better approach is to thoughtfully determine, with the help of a trained professional, an asset allocation that is appropriate for your risk profile (click here for our blog post on this subject) and re-balance on a disciplined basis.

If you’d like to get off the emotional roller coaster of investments, operators are standing by (click here to email us.)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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Have you ever taken a risk tolerance questionnaire that purports to tell how you should allocate your portfolio (they’re all over the internet) or been told that you have to know your risk tolerance before you can choose an appropriate portfolio? In fact, risk tolerance is only one-third of what needs to be considered before you can select a portfolio. There are three factors, in toto, that need to be considered, and here they are.

1. Risk Tolerance – according to FinaMetrica, this “is an individual’s general willingness to take risk (potential loss) towards achieving their financial objectives. It is the amount of risk or the degree of uncertainty that they are comfortable taking.” This has been found to be relatively stable over one’s lifetime, unlike the two following elements.
2. Risk Required or Risk Needed – again, according to FinaMetrica, this is “the risk associated with the return required to achieve an investor’s goal.” In other words, how much risk do you need to take to earn that retirement in Tahiti?
3. Risk Capacity or Capacity for Loss – FinaMetrica says this is, “is the extent to which worse than anticipated outcomes can be absorbed without impacting the achievement of important goals.” Or this could be the risk that you have a hand-lettered cardboard sign as your retirement calling card.

No one of these is sufficient. Consider the last one…it’s important to consider whether one’s portfolio risk could have you staking out a spot at the shopping mall parking lot entrance. And what if one needs to take more risk (#2) than he or she is comfortable with (#1).

Here are three graphical examples of these three elements in three different scenarios. In each of the examples below, the subject has the same risk tolerance; only the risk required and risk capacity are different. In economics, when concepts are graphed, it’s important to observe where lines intersect and are tangential. In a like vein, the important points in the image below is where there is and isn’t overlap.

The top example is the only one of the three where there is overlap amongst all three elements, and that means there is probably a portfolio that would have been, historically, able to satisfy this individual’s needs. The allocation is likely to produce volatility that is emotionally tolerable (it’s in the blue box); that satisfies, although just barely, the individual’s need for risk to meet goals (it’s in the green box); and historically, it would have produced results that would not have impoverished our individual (it’s in the orange box), although it’s near the highest level of risk capacity.

In the middle case, our individual has overlapping risk tolerance and risk capacity, meaning that there is probably a portfolio that won’t be too volatile (in the blue box) and that likely won’t impoverish the individual (the blue and orange boxes overlap.) For whatever reason, however, the individual’s need for risk—maybe his goals are too lofty or he hasn’t been saving enough—is much higher than his risk tolerance, and the possibility exists that some historical results of this portfolio might have been enough to devastate or seriously impair his financial well being (there’s no overlap of the green box with the others.) The ideal solution is probably not pleasant, as it means that, in some way or another, some goals are not likely to be reached; that is, the portfolio’s risk/return profile is going to have to be dialed back to accommodate the other elements.

The bottom case is a version of the second, only this time, there is overlap between risk tolerance and risk required (blue and green squares overlap), but both represent allocations, the historical results of which would have been likely to, again, damage financial well being. Again, the ideal solution is not ideal, with the same remedy as case #2.

So the next time you have an opportunity to answer a five-question risk tolerance questionnaire with the promise that you’ll be able to properly allocate your portfolio, think thrice.

The examples presented are hypothetical and are not representative of any specific situation. Stock investing involves risk including loss of principal. No strategy assures success or protects against loss.

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