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Balancing Your Risk Tolerance & Risk Budget

In a week that saw disgraced financier Bernie Madoff pass away, we discuss the importance of defining BOTH one’s risk tolerance and risk budget to build a solid plan to help avoid the temptations brought by greed and fear that make such monsters possible.


  1. Equity Markets – rose this week with U.S. stocks (S&P 500) up 1.41% while international stocks (EAFE) gained 1.68%

  2. Fixed Income Markets – also saw gains this week with investment-grade bonds (AGG) up 0.32% while high yield bonds (JNK) rose 0.12%

  3. U.S. Economy at Inflection Point – according to Fed Chairman Jerome Powell in comments this week around the brightening outlook on economic recovery, noting “we feel like we’re at a place where the economy is about to start growing much more quickly and job creation coming in much more quickly.” Powell also noted the biggest threat remains increased spread of Covid-19. Market data releases seemed to echo Powell’s sentiment with most notably retail sales spiking 9.8% month-over-month in March.

  4. Housing Starts Reach 15-year High – The blistering hot housing market shows no signs of slowing with a 19.4% uptick in housing starts in March from the month prior for an annualized rate of 1.739 million. The Midwest especially saw a massive gain of 122.8% as Americans continue their exodus from bigger cities. However, the momentum may not last for long if supply constraints continue to increase and lumber prices continue their rise.

  5. Key Insight – [VIDEO] In a week that saw disgraced financier Bernie Madoff pass away, we discuss the importance of defining BOTH one’s risk tolerance and risk budget to build a solid plan to help avoid the temptations brought by greed and fear that make such monsters possible. [ARTICLE] We discuss the competing narratives circulating boundless gains to be had or bubbles about to burst by grounding things in terms of both current and historical fact.



In the video above we discussed the importance of determining both your risk tolerance and your risk budget to build out a proper plan.


Many reasons of course, but one is such a plan keeps you from falling prey to investors’ greatest enemies fear & greed and all the horrible decisions that can occur when those emotions are leading the process.

In short, it’s analogous to the old saying “those that don’t stand for something will fall for anything.”

Define your dreams and goals, understand your limitations and then STAND for them in the face of all the things that try to get you off track.

What are people “falling for” these days?

While one person may justify that enormous gains in an asset merely reflect “proper price discovery” others will point to the same outsized gains and valuations as a reason to believe the asset is reflective of a “bubble” set to burst. In almost every case when such a debate occurs there are powerful narratives and convictions on both sides, but in truth, no one knows what the future holds.

Many of you remember all too well the dot.com era and the overwhelming pull from the combination of powerful narratives and the promise of great returns.

As Mark Twain said, “History may not repeat itself, but it does rhyme.”

Consider the following examples of debates between high prices justified by “price discovery”:

I get the above are not all the same, but neither do they represent anywhere near the totality of challenging investment valuations investors have to wrestle in today’s environment.

Such “valuation” concerns apply not just to individual positions but even the market as a whole (e.g. look at the next two charts which show a market historically stretched in both technical (chart #1) and fundamental terms (chart#2).

Chart #1

Chart #2

These concerns have led to a lot of fear among investors and of course a new wave of doomsayers calling for a crash.

Here are the problems with such an outlook – 1) you don’t have to buy investments with questionable and/or ridiculous valuations, and 2) the economy is strong and getting stronger by the day as true reopening approaches.

Data Continues to Improve Dramatically

Though you may be persuaded, even if incorrect, to get bearish on a given stock or market with a high valuation that seems hard to justify, you need to realize the challenge in justifying your position. This is given the strength of the economy as well as the lack of any historic correlation to a strong market run leading to near-term weakness.

A. The Data

U.S. ECONOMIC DATA – This week brought a ton of positive news/data on the economy including:

  • Retail Sales – a blowout number with March Retail Sales +27.1% year over year, and +9.8% versus -2.7% in February, bringing retail sales above their pre-COVID peak,

  • Manufacturing Strength – April Empire Manufacturing +26.3 versus +17.4 in March, Philly Fed Index +50.2 versus +44.5 in March,

  • Jobless Claims – fell sharply to 576k vs. expectations of 700k and Jobless Claims at 700K versus 769K in the prior week.

Throw in continued strength in light truck sales, average workweek hours, building permits, etc. and there is currently solid acceleration and improvement across virtually all areas of the economy.

B. When it comes to near-term market movements “The Rule is There are No Rules”

Although most people will admit that they can’t time the markets, the reality is they try and just call it by different names and say things like “the market is due” or “it’s got to go down sometime.”

While those statements may have some truth to them, they have no value as an investment strategy because again … we don’t know when!

Bespoke discussed this reality this week stating “the S&P 500 has been consistently trading in 'extreme' overbought territory in recent days (2+ standard deviations above its 50-DMA). Yesterday marked the 9th straight trading day that the S&P 500 finished the day in this area marking the longest streak since January 2018 and just the 7th streak of nine or more trading days.

However, they continued by pointing out, “The red dots in the chart below of the S&P 500 going back to 2000 show where each prior streak occurred concerning the ebbs and flows of the market. Outside of the most recent occurrence in January 2018 and another in January 2004, these prior occurrences didn't even mark short-term market peaks. As we often say, overbought markets can be resolved with corrections in either price or time (a period of sideways consolidation) or a combination of both.

Know your plan, know the actual data, know the history and most importantly know that when it comes to investing feelings, half-truths and logical fallacies need to be avoided at all costs.

Have a wonderful weekend!

Tim and the team at TEN Capital

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