Plan for Success

Terry Hartigan | Principal

Developing a road map to achieve financial success.

How Much Risk Are You Taking?

July 2013

As wealth managers, there are numerous ways in which we identify and measure risk. We may look at the volatility of your portfolio, the potential downside loss, over concentration in a particular security or asset class. We may look at the amount you are saving or the amount you are withdrawing from your portfolio. These are all very useful and valid measures of risk.

However, at Capital Directions we believe the single best measure of risk for an investor is the risk of not achieving your goals.

Most investors think of risk in terms of short term, downside fluctuations. We certainly understand the discomfort and uneasiness this can cause. But in reality, this is largely an emotional reaction. A properly constructed investment strategy is one that enables an investor to endure the short term fluctuations that will occur, yet provides them with a high probability of achieving their goals.

Very often we see investors who believe they are not taking much risk because they have low exposure to stocks. Since they do not have a lot of volatility in their portfolio, they are not taking a lot of risk, right? Maybe……maybe not.

Remember, your portfolio exists to help you achieve a certain goal either now or in the future. At some point, you will need a certain amount of dollars each year to provide for retirement living expenses, travel expenses, education expenses or healthcare expenses. If your portfolio has very low downside risk and therefore, a very low return expectation, the likelihood of achieving your goals may be very low. You may be sleeping well at night today, but you may not realize you will be forced to accept a much lower standard of living in the future.

Many sophisticated tools exist to measure your probability of success. A solid planning process should incorporate your values and your priorities to design a strategy to achieve your goals with a high level of confidence. The plan should clearly and simply communicate the trade-offs among different strategies. Allowing your planning needs to drive your investment strategy will lead you to make smart financial decisions.

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