The Rational Reminder Podcast

Episode 343 - How to Choose an Asset Allocation

Feb 6, 2025

Navigating asset allocation is essential for investment success, revealing the intricacies of risk assessment. The importance of behavioral loss tolerance and the psychological aspects of risk-taking emerge as key factors in making smart investment choices. Listeners are warned against counterproductive trading behaviors, like selling after losses. The discussion highlights how stocks can appear less risky over time, while bonds face inflation threats. A focus on compensated risks is encouraged, alongside practical insights into personal investment strategies.

01:16:20

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Quick takeaways

Choosing an appropriate asset allocation is vital as it significantly influences expected investment returns and risk management strategies.

Understanding behavioral loss tolerance helps investors maintain their strategies during market fluctuations and avoid impulsive decision-making.

An investor's capacity to take risk involves evaluating long-term financial obligations and identifying the necessity for higher returns to meet goals.

Deep dives

Choosing an Asset Allocation

Selecting an appropriate asset allocation is fundamental to achieving desired investment returns and has significant implications for an investor’s financial future. Asset allocation refers to the mix of different types of assets in a portfolio, primarily stocks and bonds. Investors need to consider their individual risk tolerance—how much risk they can psychologically manage—and their capacity for risk, which is more objective and relates to financial stability and living expenses. A well-structured asset allocation strategy ensures that investors can maintain their investments during market downturns without succumbing to panic selling.

Intro

4min

Navigating Risk in Asset Allocation

13min

Navigating Financial Literacy: The Impact of Early Investing Experiences

1min

Understanding Risk Tolerance in Investment Strategies

27min

Navigating Perceived Risk in Investing

15min

Analyzing Investment Strategies and Community Reactions to Acquisitions

3min

Acquisition Insights and Personal Reflections

12min

Choosing an asset allocation is a crucial investment decision, as it determines expected returns and risk exposure. During this episode, we uncover what this means, exploring topics such as why risk may not always be the best assessment method. We unpack the three factors that John Grable’s risk profiling framework considers: behavioural loss tolerance, the ability to take risk (which assesses the financial capacity to withstand losses without affecting lifestyle), and the need to take risk. Many investors sabotage their returns by selling after losses and buying after gains, and we discuss the reasons behind this. We also explore why stocks tend to become less risky over long horizons, while bonds can be vulnerable to inflation and interest rate changes, before explaining why investors should focus on compensated risks. In the aftershow, we address listener comments on absolute returns, XEQT, why we have made certain sponsorship decisions, and more. To gain a deeper understanding of risk and avoid common pitfalls that can undermine your returns, tune in today!

Key Points From This Episode:

(0:05:10) The critical importance of choosing an asset allocation and understanding risk.

(0:08:35) How behavioural loss tolerance impacts asset allocation.

(0:18:42) Psychological theory on risk tolerance and willingness to engage in financial behavior.

(0:30:48) Assessing your need to take risks.

(0:39:24) Why market volatility is not where the true risks lie.

(0:47:42) Private credit, other portfolio alternatives, and GICs.

(0:53:03) The aftershow: demystifying the AMA controversy.

(1:00:20) Absolute returns, XEQT, and sponsorship on the Rational Reminder. (1:12:05) An update on Ben’s health and what he has learned from this experience.

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP