Weekly Market RecapIn the past few weeks, we've seen improving European economic prospects and mediocre US data. US GDP numbers were revised down to a 0.7% decline for the first three months of the year, though many view this as a temporary blip. In Europe, signs that inflation is picking up slightly and the risks of deflation have receded were viewed positively by the markets. This is a useful reminder of the risks in short term forecasts. Last year, the story was of a robust US and a sick Europe, but now, only half way through 2015, those trends appear to be changing as European prospects improve relative to the US. We want to take a moment this week to discuss the appropriate risk tolerance for your portfolio. We automatically construct a retirement portfolio for you that reflects your time to retirement among other factors. For most people, we expect that a "moderate" risk tolerance is a good fit. For example, some people believe they need an "aggressive" risk tolerance because they are younger, but that's not necessarily the case. The glidepath we use automatically gives you greater risk and return exposure when you are young and then tapers it down as retirement gets closer. Another crucial concept to understand with respect to risk tolerance is the behavioral bias known as overconfidence. Simply put, overconfidence is the human tendency to believe too strongly in the accuracy of our own beliefs. When surveyed, 93% of American drivers rate themselves above the median. 60% of Americans believe they are better looking than the average person. Overconfidence leads us to take on more risk in our portfolios than we are actually willing to tolerate. For example, an investor may think he or she has the ability to stomach a 40% decline in their portfolio, but when that drop occurs, that same investor sells and moves to cash. During the last big market correction in 2008, more than half of "aggressive" investors moved out of equities. When stocks rebounded, they missed out on the returns. Studies show that overconfidence in investing tends tends to affect men and those under 35 the most. To combat overconfidence, recall how you behaved during the last market decline. If you haven't lived through a market decline yet, try to picture your portfolio with only 60% of it's value. Better yet, write a committment to yourself that you will not change your risk tolerance when markets are volatile. The most important thing about your risk tolerance is stick with it at all times, in good and in poor markets. It should reflect your own ability to tolerate risk through the ups and downs of the markets, not greed in the short-term. When the markets are doing well, it's tempting to be aggressive, and when markets fall, it feels better to be cautious. These types of behaviors destroy portfolio value over the long-term. Pick a risk tolerance that works for you whatever the markets are doing. When you change your risk tolerance, please note that it does result in trades that slightly drag performance due to the costs of trading. This is another reason to set your risk tolerance for the long term. Disclaimer: Your Portfolio Summary
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