Money Magazine and your "risk need"

It will be interesting to see how things play out over at Money Magazine in the next year or so, particularly if 2009 turns out to be anything like 2008, a development that, unfortunately, appears to already be well underway.

While it looked as though they were toning down the whole "stocks for the long-run" thing late last year when, along with nearly every other investment approach, their advice was producing monstrous losses, with the dawn of a new year they seem to be back at it with their "stocks are the only asset class" meme that served them so well during the last stock bull market - that is, the stock bull market that ended about nine years ago.

This was noted on a number of occasions earlier this month:

• Jan. 8th - The losses of a Money Magazine portfolio
• Jan. 15th - Let Money Magazine fix your portfolio?

Of course, eventually, they'll be correct again in their unwavering dedication to equities in general and U.S. stocks in particular - it might just take another nine years.

With the exit of Managing Editor Eric Schurenberg a couple months ago, right as things were slowing down enough so that readers could tabulate their losses - seriously, he said "what once sounded apocalyptic is now routine" and then advised buying stocks immediately to rebalance decimated investment portfolios - you'd think that there might be some developing caution, a re-assessment of their overall approach, or at least a new-found understanding and appreciation of risk, but, apparently not.

Quite the opposite, actually.

Whatever is going on at Money Magazine these days, they seem to have reached a new low in this article penned by "The Mole", Money Magazine's undercover financial planner.

Question: I'm 57 and planning to retire at 66. Before this year's stock market turmoil my 401(k) was balanced at 70% stock mutual funds and 30% bond funds. Now it's 59% stock and 41% bonds. To take advantage of very low stock prices I was thinking about re-balancing to 75% stocks and 25% bonds. Does this sound like a good plan or should I just re-balance to 70% and 30%?

The Mole's Answer: Well, you're doing two things right already:

* You are not in a panic mode, as many are, and haven't sold your remaining stock.
* You are going against the herd and considering buying when others are selling.
...
My advice is to stick with your target and I'll tell you why.

First of all, I think it's critical to develop an asset allocation target. The portion of your portfolio that should be in equities depends on two things - your willingness to take risk and your need to take risk.

You clearly have a willingness to take risk, as demonstrated by your interest in buying more stocks after this rather dismal bear market. I happen to think that this is a good thing. But I don't know your need to take risk.

One's need to take risk is driven by how close you are to achieving your goals. If retirement is your goal and you have a lot saved up with low living expenses, you probably want a very conservative portfolio of, say, 30% in stocks. But if you are far from this goal, then you will need to take more risk and may need 70% of your portfolio in stocks.

Your "need to take risk"?

Is this something new?

Like doubling down in Vegas?

Since you are far away from achieving your goal of winning $1,000 so you can take everyone out to a nice dinner, you should start upping your bets - take on more risk.

Maybe this is a new concept that the editors of Money Magazine figured would be a good follow-on to the great "risk wake-up call" of 2008. An idea that, perhaps, might be making its way around financial planning circles in a similar manner as when car salesmen are trained to ask how large a prospective car buyer's family is so they can determine how many seats they need - two, five, or seven.

Mr. Jones, "When are you planning to retire? We have to know your "risk need" before we can formulate an appropriate asset allocation."

If this kind of thinking hadn't produced such disastrous results in recent years, it would actually be quite funny.