Our “Answering Your Questions” series highlights common questions our advisors receive, and highlights our firm’s thought leadership.
How how much risk should I take in my portfolio?
Choosing an appropriate mix of cash, bonds, and stocks — and the related level of risk in the portfolio — is among the most important decisions an investor can make. Most investors think of risk as the potential for stocks to drop significantly in the short-run. But another risk is not keeping up with inflation over time due to being underinvested in stocks. So how do we balance these two types of risk as we advise our clients?
We begin by listening.
Each client has a unique situation, and we discuss the need for liquidity to fund spending, their time horizon, and their ability to live with the inevitable ups and downs of the markets. Well, the ups are pretty easy to live with. It’s the downs that are tougher!
As part of this process, we often create a customized Financial Goal Plan that incorporates their portfolios, money going in or out, varying rates of return, as well as special goals and objectives. We will model several scenarios using “monte carlo” simulation to estimate the likelihood of achieving specific goals over time. Our objective is a plan that offers a very high probability of success.
All of these factors — need for liquidity, time horizon, risk tolerance, and special planning goals, are looked at as we collaborate with clients on their “targeted” mix of cash, stocks and bonds.
The makeup of the stock portfolio and the bond portfolio within that targeted mix are based on models created by our firm’s Investment Committee. This process creates consistency across all client portfolios — ensuring all clients receive the best and most current thinking of the firm.
One additional point — we are long-term investors and do not engage in tactical allocation changes or market timing as a means of controlling risk or trying to enhance returns. Research shows that these efforts just don't add value over time.
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