If your method of determining how much risk to take in your investing was a simple questionnaire, know that that method may be inadequate. One's response to questions of that kind on a happy, sunny day may be very different from how one feels about risk when it seems the world is coming to an end, as happens occasionally. Conversely, forming judgments about risk in extremis - say, during the winter of 2008 - may not be a wise long-term approach either.
Hats off then to Evan Powers, who details a sound approach to portfolio risk. Ever the financial planner, Evan approaches this critical area through multiple directions, looking at both:
How much risk do we need to take in order to meet our future financial goals (required return), and how much risk can we afford to take before the risk of failure becomes too great for our financial plan to withstand (risk capacity)?
And not surprisingly, he addresses the reality that "for many investors, risk tolerance can outstrip risk capacity by a wide margin." Read the whole article here. It's a nice demonstration of how a professional financial planner seeks to help investors with practical solutions to their financial problems.
Let us know your thoughts in the comments sections, and below please find a few advisor-related links to conclude our week:
- If you were ever curious about technical analysis, today's Stock Exchange by Jeff Miller offers a user-friendly introduction to its methods.
- Kevin Wilson continues his recent series on investing implications of Trump's election.
- Ian Bezek anticipates one or more rate hikes and explains their long-term risks.
- Andrew Hecht argues the great bond bear market is just getting started.
- Charles Hugh Smith is concerned about long-term solvency amidst an oversupply of labor.
- For more content geared to FAs, click here.