Most people seem to like risk when they are winning, but become prudish when they are losing. It’s not logical, since with high risk comes big ups and big downs. They are opposite sides of a coin. But to quote Spock from Star Trek, “it is human”.
The whole field of behavioral finance considers the way humans think about risk. For a long time, we have looked for various measuring tools or “risk tolerance tests” to objectively help us “fit” the portfolio to the client. The tests are generally great for legal protection for the firm, but not very predictive about what a client really wants. For example, a person might agree that a 10% loss is acceptable, but when you apply that 10% loss to the actual size of their account the results start to really vary. 10% of $100,000 might be acceptable at a $10,000 loss, but 10% of 5,000,000 would be a $500,000 loss and that might seem like way too much risk.
People also tend to relate to risk in short periods, like over 6 months. If you ask about total downside risk, that is maximum drawdown, they tend to be surprised. During 2007 – 2009 the S&P 500 was down 53% and a broadly diversified 70% stock/bond portfolio was down 34.3%.
At Protection Point Advisors, we have a new tool from Riskalize.com that allows anyone to get an instant risk analysis 24/7 at no cost. With just a few clicks and questions you will uncover where your expectations may be out of alignment with how your portfolio is actually invested. We are always working to make sure that your investments and your investment goals in good relationship both each other. To find your risk number now, CLICK HERE.
With your free Portfolio Risk Analysis, you’ll finally be able to answer questions like…
Advisory services offered through EWG Elevate, Inc. dba Protection Point Advisors.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.