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What the Heck is an RTQ (Risk Tolerance Questionnaire) ?

In this edition of TABR’s quarterly newsletter, we thought we’d touch on an area that has been getting some attention in the financial press recently—the use of risk tolerance questionnaires, or risk profiling, to help categorize clients and to appropriately allocate their investment funds.

In addition, we have sections on Living to 100, which ties into our financial planning work, Password Managers, and the LifeLock Question.  All in all, we’re addressing different kinds of risk this quarter, from market/portfolio risk, to longevity, to cybersecurity and identify theft, which are interrelated.

Risk Tolerance and Risk Capacity

I got the idea for this topic in mid-September when there was an article in the Money section of USA Today by Robert Powell, which essentially questioned the helpfulness of these tools.  Given that the U.S. stock market has not had a down calendar year since 2008 (as measured by the S&P 500), it could be argued that we’re overdue for a negative environment.  That’s not a forecast, but it’s certainly better to have an umbrella before it rains, not after.

Investopedia defines risk tolerance as “the degree of variability in investment returns that an individual is willing to withstand.”  They go on to say “you should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments.  If you take on too much risk, you might panic and sell at the wrong time.”

Indeed, in the profiling tool from FinaMetrica we use with clients, one of the questions asks—“By how much would the value of your portfolio have to decline before you would begin to feel uncomfortable?”  Then, five possible responses are provided—by any amount, 10%, 20%, 33% and 50%.

The whole objective with this particular line of thinking is to help find out where your line in the sand is. In our experience, which now spans 34 years, when an investor is experiencing too much pain and they do not have an understanding of historical market returns, they are likely prone to making emotional decisions which in the vast majority of cases, become quite harmful to the bottom line.

Risk capacity, on the other hand, is a bit different.  This is a measure of the extent to which an investment strategy can withstand bad outcomes without seriously impairing the achievement of one’s financial goals.

Balancing one’s risk tolerance with their risk capacity and blending it with one’s goals should be the ultimate objective, in our view, and is an important part of the financial planning process.  Though it may be the opinion of others that there aren’t many effective tools in this area, I disagree.  The profiling tool we use scores clients on a bell curve, and compares results against all others who have taken the profile.

For instance, recently a prospective client scored a 31 (on a 0 to 100 scale).  This was lower than 96% of all scores.  The information goes beyond just labeling one as Conservative, Moderate or Aggressive.  And, by the way, the scores have nothing to do with age.  We have 35-year-old clients who are Conservative and we also have 70-year-old clients who are Aggressive.  That can depend in part on one’s personality, and as referenced above, risk capacity.

The best way to illustrate this concept is with a couple of examples.  In the first example, let’s say Dave is in his mid-50s, has an investment portfolio of $1.25 million, a pension that will pay him $65,000 annually at age 65, which will meet almost all of his family’s spending needs, along with expected Social Security benefits of $30,000 per year at age 66.  Ideally, he would like to take an income of $20,000 from the portfolio to supplement his pension and Social Security.  This is only a 1.6% withdrawal rate.

Within this overall context, Dave has a high capacity for risk.  Why?  Because, even if his portfolio were to drop 30%, it would hardly have any effect on him achieving his goals, since they are almost completely met from the pension and Social Security.

In this regard, Dave can afford to take a more aggressive approach with his investments (risk tolerance), but it does not mean he has to, or even if he should. Maybe he is a conservative guy, and doesn’t feel comfortable with the risk of an aggressive portfolio.  On the other hand, maybe he views the portfolio as legacy money for his children, and actually wants to maximize its growth.  In that case, perhaps he is aggressive with it, because he has the risk capacity to do so.

In our second example, let’s suppose Cathy is a 65-year-old retiree who has a $1 million portfolio, and needs to generate $60,000 a year in distributions to support her retirement cash flow needs.  In today’s environment of low interest rates and lofty stock market valuations, a 6% withdrawal rate is a dangerous risk, as a significant market decline (even with a balanced portfolio), could easily put her on a path where the portfolio would be headed towards extinction at an early age without significant adjustments.  As a result, Cathy has a low risk capacity.

Though she needs high returns to meet her income goals, if she has a low tolerance for risk, there’s really no way to achieve her goals without taking the risks that she is really not comfortable with.  This can set up a conundrum, where the goals themselves are risky, and realistically can’t be achieved.

Our Process

When it comes to determining the right allocations or portfolio strategies for clients, we tend to work backwards.  First, we believe one must start with the goals.  Then, you can work back to risk tolerance and risk capacity.  But, the conversation does not start and end by simply having the client take the risk profile questionnaire.  That’s simply the starting point.

We find more value in taking the results of those profiles, and then discussing them in the context of historical market outcomes, especially using the worst outcomes as reference points.

It’s also important to understand that drawdowns don’t magically stop and start in a calendar year timeframe.  For instance, the S&P 500 declined by over -37% in 2008. But, its actual worst loss took place from October 2007 to March 2009, when it fell by over -56%.

As mentioned above, the S&P 500 has not had a losing calendar year (when counting reinvested dividends) since 2008, but that doesn’t imply there haven’t been losing periods.  In fact, we’ve noted as have others that the average decline for the index in a typical year is about -14%.  Below, we’ve shown the two largest declines since the March 2009 bottom, and also thrown in the Russell 2000 Index, which is representative of small companies.  For some additional context, we’ve also included the performance of TABR’s Tactical Moderate and Conservative accounts, along with TABR’s Passive account.

 Period from 4-29-11 to 10-3-11 Period from 5-21-15 to 2-11-16
 S&P 500 Index  -19.38% -14.15%
 Russell 2000 -29.56% -24.11%
 TABR Moderate  -6.81% -7.41%
TABR Conservative  -3.64% -6.58%
TABR Passive -16.84% -12.33%

Please note these are not apples to apples comparisons.  The S&P 500 Index and Russell 2000 Index are 100% allocated to stocks (large companies and small companies).  The TABR Tactical Moderate account has had a maximum equity allocation of 55-60%, while the TABR Conservative account has maximum equity exposure of 40%.  TABR’s Passive account has used a classic mix of 60% stocks and 40% bonds, and used both actively managed funds along with index funds, and is always fully invested, whereas the tactical accounts vary their exposure to markets based on TABR’s risk models.

There are a couple of things notable about the above results.  Notice that the fully invested passive portfolio dropped almost as much as the S&P 500 Index, even with 40% of the account devoted to bonds.  Second, notice the much lower drawdowns of the tactical accounts.  To be balanced on this subject, there is no doubt that being fully invested for the last 6 years has been a better strategy than being tactical.  To get those returns, though, one would have had to be fully invested all the way down, and stay in.

Candidly, that is not the type of client we typically attract.  From a risk standpoint, most people aren’t wired that way, to withstand the maximum drawdowns of the financial markets.  It only takes once to bail out of a strategy (which usually happens when markets are in free fall) at the wrong time to derail one’s financial plan and balance sheet.  And a discussion about risk is not a one-time event.  We bring it up at different times as clients go through different stages.

The best time to have these discussions is when markets are calm, or have been doing relatively well in recent times.  Which is why we are writing about this topic now. Though the vast majority of our stock and bond models are moderately bullish at this time, we know that is not always going to be the case.  It is always a good idea to check that your umbrella works, before it rains.

Living to 100

In the financial planning process, one of the common objectives we get from many people is something along the lines of “is our money going to last?”  I would say there are five factors that go into determining that answer.  How much one is spending, your income, the assumed rate of inflation of that spending, the assumed rate of return on investments, and finally, how long are you going to live?

The latter question might be under the category of Longevity Risk.  For most of the planning work that Steve Medland and I do, we typically begin with the default assumption of our planning software, which tends to assume that the man will live until age 90 and the woman until age 92.  Based on a variety of studies, there appears to be about a 1 in 3 chance that one spouse of a 65-year-old married couple will live until their early 90s.

For some context, life expectancy for females born in 2013 is now 81 years and 76 for men, according to Carolyn McClanahan, a CFP and Financial Planning magazine contributing writer.  A man reaching age 65 this year can expect to live to 84, while a similarly aged woman can expect to live until 87.  Approximately one out of ten 65-year-olds now alive will live past 95.

Obviously, if one lives longer, it also means the money has to last longer, and whether odds decrease is very much dependent on the individual circumstances of each case. If one has a decent pension with a cost-of-living rider, such as a state government employee, coupled with a decent amount of savings, and spending is within one’s means, then a long life into the 90s likely won’t pose a problem.  It’s potentially a very different story if one is very dependent on investment returns (large IRA / 401 (k), no pension, normal Social Security).

Over the years, we’ve often heard from clients, both with and without children, that they really didn’t want to die and have $1 million or $2 million left over.  The paradox of that thinking is of course this—tell us when you’re going to die, and we’ll tell you how much you can spend.

Certainly, that’s impossible.  But, for those who may want to do more than just guess at how long they’ll live, there is the option of a life expectancy calculator.  I suspect there are several of these out there in Internet land, but I’ve not searched any of the alternatives.  The one we’ve come across is at www.livingto100.com, and is based on the book by Dr. Thomas Perls, “Living to 100:  Lessons in Living to Your Maximum Potential at Any Age.”

According to the website, the calculator uses the most current and carefully researched medical and scientific data in order to estimate how old you will live to.  The calculator asks 40 questions related to your personal health and family history.  These range from your height and weight to your health history, eating and drinking habits, to the age of your parents when they died and what they died from (or if they are still living).

As we are entrusted with the most intimate parts of clients’ lives (not just their money), I realize some people will not be comfortable in going through this process.  It is a similar roadblock that we sometimes encounter when discussing life insurance coverage (or for some, the planning process itself).  Some people just don’t want to know, or they fear the feedback is not going to be positive, so they avoid the topic or the process altogether.

Let’s face it.  Life is not necessarily equal, or fair.  If one is applying for life insurance, you can bet that all of the factors considered in this life expectancy calculator are considered, and probably a lot more.  If you are 60 years old, for example, and happen to be a male who is 6′, 165 pounds, and you exercise 3 times per week and hardly drink alcohol and have no history of heart disease in your family, then you’re likely going to be considered a low risk to an insurance company, with an above average life span, and therefore your premiums are going to be lower.

In contrast, your premiums are going to be significantly higher if you’re a 60-year-old male who is 5’10” and 250 pounds, who doesn’t exercise, is diabetic and drinks 10 beers a week while also having heart disease in his family tree.

Nothing is certain when planning for the future, but I think for those who are willing to add this information to the process, it can help us in building better plans.  As an example, what sense does it make to try and be sure funds will last until 92 if the probabilities suggest 85 is more likely?  This is the kind of information that would allow us to counsel a couple or individual to enjoy their money while they can, in their late 60s or early 70s, while they hopefully still have good health, rather than fretting about getting to age 90.  There are tradeoffs, but most people will adjust when faced with the facts.

We’ve mentioned repeatedly over time to both prospective clients and existing clients that we think it is important to put our money where our mouth is.  We invest our own money (as does our staff) in the exact strategies we use for clients.  If it is good enough for you, it better be good enough for me.  In that vein, I recently used the life expectancy calculator and the result was that I’m expected to live until 92.

I’m not sure what to think of that.  For some context, I will be 59 in November, and stand 6′ and 170 pounds.  I was 135 pounds as a senior in high school, probably the lightest guy on the varsity baseball team.  I pretty much eat what I want, but mostly get more disciplined when I get 4 pounds over my target weight of 168.  I typically run 3 to 4 times per week, as part of a workout routine which includes up to 600 jump ropes.  That’s so I can enjoy two of my favorites—pancakes and bacon, and Mexican food, on a semi-regular basis.  Steak, rice pilaf and caesar salad aren’t exactly strangers either.

Drinking was a lot more prominent in my 20s, until around age 24, when I had one of those “please, God, I’ll never do this again if you’ll just take my stomach pain away” moments.  Candidly, though I occasionally enjoy a Coors Light or a Corona, or some white wine, I actually prefer Dr. Pepper.  The problem, there, though, is too much sugar so I do try and limit my soda consumption.

Up to now, I’ve been blessed with pretty good health, and hopefully that continues, but we’ll all die of something.  My main cholesterol score has been borderline OK (198), with the most nagging concern being that of a rising PSA (prostate specific antigen) score.  In the last three years, that has resulted in two MRIs and two biopsies, both thankfully negative.  I’m told I have BPH (benign prostatic hyperplasia).  In English, that means I have to go to the bathroom frequently, but I guess the acronym IHTGTTBF is too hard to remember.

My father died at age 72, of stroke-related and heart disease complications and was diabetic.  In contrast, my mother passed away this past January at age 91.  She had a quadruple bypass at age 83 and spent the last three years in skilled nursing with dementia-related issues.  I’ll say this—I don’t want to live to my 90s if I were to have the ending my Mom had.  On the other hand, I’d prefer not to go at 72, like my Dad. How about 80, with good health?  We do have some control over the matter in how we treat ourselves, but only the man upstairs knows our end date.

Earlier this year, three of our clients passed away within a two-month span.  They were all female, and at ages 78, 86 and 88, respectively.  The 78-year-old was a heavy smoker right up to the end, and she and her late husband were clients with us for 33 years.  Forecasting future market returns is fraught with the similar uncertainty of wondering how long we’ll live.

But, there are tools to help us assess those probabilities and make better decisions. Since this topic can be a sensitive one, yet an important one, compassion and care should be an obvious part of the process. It might be as simple as asking “what are you doing to take care of your health?”

Password Managers

We’ve written in the past about the digital security footprints we all leave online, and the importance of somewhere keeping a record of the various user ids and passwords we use to enter websites, especially those of a financial nature.  At a minimum, a handwritten sheet stuffed in a file that your spouse or family members know about is better than nothing.  Better yet might be a spreadsheet, printed out or stored on an external hard drive (assuming the family members or friends know how to get to it).

Many of us tend to use variations of similar user ids and passwords so they are easy to remember, even though we’ve all been warned against doing this.  Even with good intentions, this is an on-going process since we are often asked to update our passwords from time to time.  But, do we then remember to update our master worksheet?

As a New York Times article reminded us last week, “the recent revelation that the account information of at least 500 million Yahoo users was stolen in 2014 was a big reminder that we all need to be smarter about our digital security.”

I just counted the number of websites that I have a user id and password for.  It ranges from airline frequent flyer accounts to bank and brokerage accounts to newsletters I subscribe to, to newspapers such as the Wall Street Journal, to the Social Security Administration and the Franchise Tax Board.  The total was a staggering 69.

As full disclosure, I’ve not yet implemented what I’m about to recommend (but partner Steve Medland has).  I don’t have an aversion to technology—I’ve just been lazy.  It is much like where I know that I should spend the $80 and the time to register for a permanent TSA Pre-Check, since I fly a reasonable amount of time, but I just haven’t done it (yet).  At some point, we all have to follow that NIKE slogan and Just Do It.

I’m referring to using an application called a Password Manager which will manage all of this information over various devices, and allow you to only have to remember one user id and password, preferably a strong one that would be difficult to figure out.

In reviewing a couple of articles that have covered this topic, both from the Wall Street Journal and the NY Times, three programs seem to fit the bill, 1Password, which is the best known, along with Dashlane and LastPass.  Dashlane actually has a free version, but the premium versions of the programs seem to be the best choice, because they tend to allow a sync across multiple devices, such as your home desktop computer or laptop along with your phone.  These versions run from $12 annually for LastPass to $36 for 1Password and $40 annually for Dashlane.

I know that some of you will be uncomfortable having all your information sitting somewhere in the cloud, and might even wonder what would happen if somebody managed to get your master password? Even if that happened, you’re still protected by an additional layer of security—Dashlane won’t let someone unlock your passwords on a new device without first entering a constantly changing code which it sends directly to your phone or email.  This is called two-step authentication, and is only available from Dashlane and LastPass.

That is the same process that all of us at TABR must use to access your client data from Fidelity, and for that reason, I’d only recommend using one of those two programs.  There’s only so much we can do to protect our own data, but if we’re doing nothing, we become more vulnerable.  At a minimum, at least have a process in place, even if it is the old school paper and pencil (or pen).  And make sure a spouse or close friend or family member knows where you keep your list (or give them a copy).  For those who are comfortable with them, Password Managers can save time, headaches and make your presence online much safer.  I’ll report back when I’ve implemented this with my own data.

The LifeLock Question

Most of us have seen the LifeLock commercials—you know, the ones where the company’s CEO, Todd Davis, advertised his real Social Security number in an attempt to prove how “secure” their service was. The problem is, according to a Horsesmouth article in September 2015, Davis had his identity stolen 13 times after these commercials were aired.

LifeLock describes itself as an “identity theft protection” company that helps combat identity theft and also helps those who have already been defrauded.  The basic service runs $110 annually, per person, and monitors your credit and alerts you after new credit applications are filed.  It also offers Lost Wallet Protection which helps you cancel and replace payment cards if your wallet is lost or stolen.  In addition, it notifies you of change of address requests, and patrols websites on the black market for your data.

I’ve been using LifeLock for about four years now and hadn’t really thought about it much until recently when a client asked our opinion of the service and whether we felt it was worth it.  After doing some reading and a bit of research, I’m a bit ambivalent about it.  At the core, I think these services make us feel like we’ve taken some action to do something, but I was reminded after seeing a Reviews.com article, “No matter what it promises, even the best identity theft protection service can’t actually decrease your chances of becoming a victim.  If your identity gets hacked, you’ll have to repair the damage.  There’s just no way around it.”

The reality is, you can do many of the things these services offer yourself, for free.  But, it takes self-action, and frankly, many of us are lazy.  One of the most effective things one can do is freeze your credit. This locks your credit file with a special PIN so no new credit can be activated without your permission. When you need credit, you can lift the freeze with the same PIN, and freezing and unfreezing your credit costs only about $10.  In this way, you control your credit and make it closed to fraudsters.

Most of the services offer access to your credit report from one of the three credit bureaus.  Again, everyone has access to a free credit report without having to pay. Note—a credit report is not the same as your FICO score.  If you want to learn what your FICO score is, which is a very big deal if you are applying for a home loan or other types of credit, you are typically going to have to pay a fee.

By the way, I think it’s worth mentioning that LifeLock has paid a $100 million settlement to the Federal Trade Commission regarding deceptive advertising and a new complaint has recently been filed, suggesting the company has not lived up to the agreements to mend its practices.

Speaking of being lazy, I’d neglected to realize that our annual renewal was coming up with LifeLock as I was thinking of writing about this topic, and presto, there was the charge on our monthly credit card bill. It’s been quite some time since we’ve had to request any new credit, as we just use two credit cards–a Fidelity Signature VISA for almost everything, and an American Express Gold Card, primarily for a travel medical plan and formerly to use at COSTCO (which has now switched to VISA).

Bottom line, if you’re resourceful and pro-active, freezing your credit would be quite helpful.  I can’t really recommend LifeLock as the best solution in this area.  For those so inclined, the reviews suggest that ID Watchdog and Identity Force are a better alternative, though they both appear to be priced even higher.  Just remember—you can do everything right and still get hacked or have your identity stolen, as one of our clients informed us a year ago, when their health-care provider from several years ago got hacked, and someone actually tried to file a tax return in their name to get a refund.

I hope these discussions have been helpful.  I’m still behind on my targeted publication schedule, but there will be another one of these in December, and then another by early to mid-February to get us back on track from a time/spacing perspective.

All of us at TABR are grateful for the trust and confidence you express in us daily.



Bob Kargenian, CMT

TABR Capital Management, LLC (“TABR”) is an SEC registered investment advisor with its principal place of business in the state of California.  TABR and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisors by those states in which TABR maintains clients.  TABR may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

This newsletter is limited to the dissemination of general information pertaining to our investment advisory/management services.  Any subsequent, direct communication by TABR with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.  For information pertaining to the registration status of TABR, please contact TABR or refer to the Investment Advisor Disclosure web site (www.adviserinfo.sec.gov).

The TABR Model Portfolios are allocated in a range of investments according to TABR’s proprietary investment strategies. TABR’s proprietary investment strategies are allocated amongst individual stocks, bonds, mutual funds, ETFs and other instruments with a view towards income and/or capital appreciation depending on the specific allocation employed by each Model Portfolio. TABR tracks the performance of each Model Portfolio in an actual account that is charged TABR’s investment management fees in the exact manner as would an actual client account. Therefore the performance shown is net of TABR’s investment management fees, and also reflect the deduction of transaction and custodial charges, if any.

Comparison of the TABR Model Portfolios to the Vanguard Total Stock Index Fund, the Vanguard Total International Stock Fund and the Vanguard Total Bond Index Fund is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the TABR Model Portfolios due to varying degrees of diversification and/or other factors.

Past performance of the TABR Model Portfolios may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results above in part because client accounts may be allocated among several portfolios. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

The TABR Dividend Strategy presented herein represents back-tested performance results. TABR did not offer the Dividend Strategy as an investment strategy for actual client accounts until September/October 2014. Back-tested performance results are provided solely for informational purposes and are not to be considered investment advice. These figures are hypothetical, prepared with the benefit of hindsight, and have inherent limitations as to their use and relevance. For example, they ignore certain factors such as trade timing, security liquidity, and the fact that economic and market conditions in the future may differ significantly from those in the past. Back-tested performance results reflect prices that are fully adjusted for dividends and other such distributions. The strategy may involve above average portfolio turnover which could negatively impact upon the net after-tax gain experienced by an individual client. Past performance is no indication or guarantee of future results and there can be no assurance the strategy will achieve results similar to those depicted herein.

For additional information about TABR, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein.  Please read the disclosure statement carefully before you invest or send money.

A list of all recommendations made by TABR within the immediately preceding one year is available upon request at no charge. The sample client experiences described herein are included for illustrative purposes and there can be no assurance that TABR will be able to achieve similar results in comparable situations. No portion of this writing is to be interpreted as a testimonial or endorsement of TABR’s investment advisory services and it is not known whether the clients referenced approve of TABR or its services.


By Bob Kargenian | Quarterly Newsletter