Choosing the portfolio risk level

The appropriate level of risk for a portfolio will be the lower of:

• the maximum acceptable risk given the investment horizon. The shorter the horizon, the less risk can be taken. The volatility of equities should not be underestimated: historically, it takes 12 years to be certain of a positive return on the S&P 500 (see chart).  
• the maximum loss tolerated by the investor during intermediate periods. Even with a very long horizon, you may not be willing to tolerate a loss of more than 10%, 15%, etc. per year with a given probability level of f.e. 97.5%. 

For well-diversified multi-asset portfolios with currency risk limited to the international equity portion, the usual recommended time horizon is a minimum of 3-4 years for 25% in equities, 5-6 years for 50%, and 7-8 years for 75%.

Working with a probability of 97.5%, if you cannot tolerate an annual loss of more than -x%, for example, the volatility of your strategic allocation must be less than x%/1.96 (example: max -10% ==> max volatility 5.10%) under normal circumstances (assuming a normal distribution of returns, which underestimates the true risk).

It is advisable to divide your savings into three buckets: 1) emergency savings (e.g., six months' salary); 2) medium-term savings (2-3 years); and 3) long-term savings (10 years or more). Only category 3) can be invested in risky assets such as stocks and commodities. Bonds are preferable for 2/ and money market investments for 1/. It is perfectly possible to have several portfolios with different time horizons.