Risk Tolerance

You want to avoid “Accidents” in retirement, and every accident is a result of a risk that you knowingly or unknowingly took on. Therefore, the key to avoiding your retirement “Accidents” begins with the identification of the risks.

It’s become common practice to utilize U.S. historical data when projecting the resilience of your financial plan. However, this can potentially underestimate the risk of a significant market crash, as relying solely on U.S. data may lead to an inaccurate perception of downside risk.

Although traditional quantitative tools exist to help control risk in an investment portfolio (Sharpe ratio, Treynor ratio, etc.), these can also be misleading because risk is multidimensional and sometimes psychological.

You shouldn’t let the possibility of something happening dictate all of your financial decisions. Look at your own unique financial situation and leverage a comprehensive framework so you can ignore the news headlines and enjoy the here and now.

Is the Silicon Valley Bank (SVB) collapse worth your concern? Maybe not directly, but it reveals valuable lessons to be learned about your liquid dollars – and investing.

Times of market volatility may cause you to second guess your investment strategy. You might assume the future looks riskier and a change is in order, but that’s not always the case.

Despite what a quick search on Google will tell you, every investment has risk.

Looking at today’s financial markets, “risk-free rate” is one of the easiest, most observable aspects to watch above the waterline.

According to the 1950-era modern portfolio theory, volatility is the most appropriate measure for portfolio risk. It draws down to utilizing the statistical concept of standard deviation; but while this makes the metric mathematically simple and easy to estimate, it also carries some disadvantages.

The reality is, unexpected events will happen; however, preparing for them as much as possible ahead of time is where true financial confidence lies.

The “Margin of Safety” concept can be dated all the way back to the 1930s, first mentioned by American economist and author, Benjamin Graham. In the case of investing, it means you should always leave room for error, or the possibility that your potential outcome may not be precisely right.

When it comes to volatility and finding a desired risk level within your portfolio, here is a handy acronym we at Howard Bailey even use with the families we meet with: C.A.N. you take the risk? (C-Capacity, A-Attitude and N-Need).