By FPA member Jerry Miccolis, CFA®, CFP®, FCAS, MAAA

Last Updated: May 23, 2011

Check Your Risk Tolerance

Before the 2008 market meltdown, you may have thought you had a handle on your investment risk tolerance. Risk tolerance is the amount of short-term loss you can stand and still sleep at night. Some people don't mind if their total portfolio falls 25 percent or more in a year because they feel it will recover before they need to spend it. Others get seasick if they lose five percent.

Now that you've lived through the worst financial storm in almost a century, your views about risk may have changed. You may have a different outlook on how much volatility you can comfortably withstand.

Talk to your financial planner about how your risk tolerance may have changed, and decide how that should impact your investment portfolio. 

Revisit Your Asset Allocation

The past years have provided an object lesson in the importance of having a sound asset allocation — and sticking with it. On one hand, people who had all their eggs in the stock basket had a lot of broken eggs when the stock market tanked. On the other hand, people who fled the market entirely when it was at its nadir in March 2009, before its big recovery, now wish they hadn't. History has shown that those that had a well-balanced portfolio — and stuck with it through good times and bad — did best.

Your target asset allocation — the percentage you invest in stocks, bonds and alternatives, such as commodities and real estate — should not change according to the whims of the market and the economy. (If the market's gyrations have pushed your actual asset allocation out of whack, it's time to get it back to target by rebalancing.) But your allocations should change as your life changes. Some of those changes are gradual, such as aging or deteriorating health; some are sudden, such as loss of a job, birth, death, divorce, unexpected dilemmas or windfalls. It's a smart idea to talk to your financial planner and make sure that your asset allocation reflects your current life situation and risk tolerance.

FPA member Jerry Miccolis, CFA®, CFP®, FCAS, MAAA, is Principal, Chief Investment Officer, and Senior Financial Advisor at Brinton Eaton Wealth Advisors, a fee-only financial-planning firm in Madison, N.J.  He is also co-author of "Asset Allocation For Dummies®" (Wiley 2009).