Risk & Allocation
Stated risk appetite rises with the market
The same investor will describe themselves as adventurous after two good years and cautious after a bad one, with no change in their circumstances.
This is written to be used rather than admired. Each section below is a decision about shifting risk appetite, and each one has a default.
Before you start
- Self-reported risk appetite tends to move with recent market conditions.
- Circumstances change slowly while stated appetite changes quickly.
- Fixed targets and scheduled rebalancing insulate the plan from this drift.
Appetite tracks the market
Surveys of investor sentiment have generally found willingness to take risk rising after strong periods and falling after weak ones. This happens in the same people, with the same jobs, obligations and horizons. Since none of the underlying factors changed, the appetite is reporting conditions rather than capacity.
It is recency operating on self-assessment rather than on forecasts.
The consequence is buying enthusiasm
Higher stated appetite after a rise leads to increased allocation to what has already risen. Lower appetite after a fall leads to reduced allocation to what has already fallen. Repeated across a cycle, this is a mechanism for systematically raising exposure at higher prices.
Each individual decision feels prudent, which is why the pattern survives.
Why it feels like new information
After a fall, the risks are vivid, specific and widely discussed, so caution feels like a response to evidence. After a rise, the risks are abstract and the recent record is reassuring, so confidence feels justified.
In both cases the salience of information has changed rather than the information itself. Noticing that your appetite moved without your circumstances moving is the practical check.
Anchoring the plan against it
A written target allocation, set with reference to horizon and capacity, gives you something stable to compare against. Scheduled rebalancing then mechanically trims what has risen and adds to what has fallen, which is the opposite of appetite drift. The discomfort of rebalancing is a sign it is working against the tendency described here.
Automating contributions removes appetite from the monthly decision entirely.
Legitimate reasons to change allocation
A change in horizon, income stability, obligations, or the size of the portfolio relative to the goal are all real reasons. Discovering through experience that your tolerance is lower than assumed is another, best acted on once markets are calm.
None of these are market conditions, which is the filter to apply. Writing the reason next to the change creates a record that makes drift visible over time.
Watch it in both directions
The cautious version after a crash is as costly as the confident version after a rise, and receives far less criticism. Investors who moved to cash during a fall and stayed there for years experienced a genuine and lasting cost.
Both are the same failure of stability, and both are corrected by a written target. Anything material to your circumstances remains a matter for regulated advice rather than sentiment.
The takeaway
If your risk appetite changed and your life did not, the market moved it for you.
The version you keep doing is the version that works.
Questions readers ask
Is it wrong to feel more cautious after a crash?
The feeling is normal. Acting on it by permanently reducing exposure is the part worth examining, since nothing about your circumstances changed.
How do I know if my appetite has drifted?
Compare what you say now to what you wrote when you set your target. If the difference tracks the market, the market is doing the talking.
