“It is good that we do not have to try to kill the sun or the moon or the stars. It is enough to live on the sea and kill our true brothers.”
– Ernest Hemingway
One of the most common questions I get is, “What should I invest in?” This question can only be answered on a case-by-case basis; the answer is unique to each individual who asks it. One’s age, reason for investing, retirement fund, and other monies will heavily affect the answer one gets. There is no one-size-fits-all investment portfolio.
Interestingly, the Torah seems to make a similar point when describing the creation of the world. This week, we restart the annual cycle and begin at the first Torah portion, Parshat Berashit. After God separates the waters from the dry land, the Torah says: “And God called the dry land earth, and the gathering of waters He called the seas.”
Rashi immediately notices something unusual. Why does the Torah use “seas” in its plural form? Aren’t all the world’s waters ultimately connected?
Rashi then says that, although all seas are connected, there are still differences between individual parts of the sea. He famously writes that “the taste of a fish that comes up from the sea at Acco is not the same as the taste of a fish that comes up from the sea at Aspamia” (Rashi, Bereishit 1:10).
This is a fascinating idea. One enormous body of water, but not every part of it is identical.
One market, millions of investors with different financial needs
The same can be said about investors. One market, but many investors. We often talk about “the market” as if it is one entity. The stock market fell. Bonds rallied. International stocks lagged. But behind those headlines are millions of individual investors with differing financial circumstances.
Consider two people, both 55 years old, each with $1 million invested. At first glance, it might seem obvious that they should have the same portfolio. But what if Investor A plans to retire in two years, has significant expenses coming up, and expects to begin withdrawing from the portfolio almost immediately? Investor B, meanwhile, plans to work until age 70, has a substantial pension, and doesn’t expect to touch the $1 million portfolio for another 15 years.
Because of this, the duo will diverge as they allocate their assets. The first investor will need more liquidity and greater protection against a market decline at the wrong time. The second investor will be better-positioned to accept short-term volatility in exchange for potential long-term growth.
Neither investor is right or wrong. Their paths diverge because they have different financial needs. This becomes even more important when we discuss risk tolerance.
I’ve met investors who watched their portfolios fall 20% and barely blinked. I’ve also met people who panicked after a 5% decline. There is nothing inherently wrong with either reaction. The mistake is putting an investor into a portfolio that doesn’t match their tolerance for volatility.
Why risk tolerance is essential to building the right investment portfolio
A portfolio can look fantastic on paper. It can have excellent historical returns and impressive statistics. But if the investor cannot emotionally withstand a major market decline, it may be the wrong portfolio. That’s why risk tolerance isn’t simply a box to check off. It is a crucial part of portfolio construction.
Sometimes, I think that investors approach investing backwards. They start with the investment first, and only try to figure out what to do with it afterwards.
“I heard this ETF is doing really well.”
“My friend bought this stock.”
“My brother thinks technology is going to explode.”
Investment strategies should reflect financial goals and time horizons
Investing should start with the goal, not the investment. If you’re saving for a home that you plan to purchase in three years, the portfolio should reflect that relatively short time period. If you are saving for retirement 20 years from now, then the calculation is drastically different. If you are already retired and withdrawing money every month, the portfolio needs to take cash flow and sequence-of-returns risk into account.
And if you have a pension, rental income, or other substantial sources of income, your portfolio may be constructed differently from someone who depends almost entirely on investments for retirement.
The investor’s real goal isn’t to construct the portfolio that performed best last year. The investor’s goal is a portfolio that gives them a reasonable chance of achieving their financial objectives while taking an appropriate amount of risk.
Rashi’s comment about the plural form of “seas” contains a powerful lesson. The Torah could have simply referred to one great body of water. Instead, it used the word “seas” to inform us that the seas are not one enormous entity – each sea is instead a distinct part of a whole.
Investing is no different. We all participate in the same global financial market. We see the same headlines and market crashes. But we don’t live the same financial lives. Our goals and expenses are different. Our family obligations are different. And our ability to tolerate risk is different.
The world of investments may be one great sea, but there are millions of people swimming in it. And just as Rashi teaches us that the waters of Acco aren’t quite the same as the waters of Aspamia, the right portfolio for one investor may be completely wrong for another.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net).