What Are You Willing To Risk? Properly Framing Risk Tolerance Discussions.


It is well over sixty years since Professor Harry Markowitz introduced Modern Portfolio Theory to investors- creating a paradigm for investing that is still widely used today. Despite its flaws, the theory successfully introduced the idea of measuring the risk of an investment, and suggested that a portfolio of investments could be combined to provide a maximum level of return for a specified level of risk. Investors, thus, could create an optimal portfolio based on the level of risk they were willing to accept. This is now seen as orthodox investment management advice, but was truly revolutionary thinking in 1952. Subsequent research and improvements in mathematical modeling and computer technology have made quick work of creating a well-diversified portfolio of investments that should help reduce risk and improve overall return. But is it really so simple? Decades of experience and hindsight have shown that accurately measuring investment risk, and an investor’s reaction to it, is a thorny issue. It is also an area where good advisors can help tilt the odds of capturing long-term portfolio growth in the favor of investors. Continue reading


5 Risks to your Retirement Planning

dice money retirement riskOne of the biggest retirement issues that people face is that they have not spent enough time planning for retirement and therefore don’t have a plan in place to retire confidently.   No matter your age, you should have a plan that is specifically designed to meet your personal goals and needs while taking into account your time horizon and level of risk tolerance.

Every retirement plan should:

1. Provide for predictable streams of income that are reliable and can help avoid surprises. 

2. Allow for access to your financial assets to meet your changing needs over time

3. Include some elements for growth opportunities so that your income has the potential to keep pace with inflation.


There are 5 big retirement risks that people face:

1.  Inflation Risk  This is your reduction in purchasing power over time.  At a bare minimum, your income should keep pace with inflation in order to maintain your standard of living.  Did you know that you that you would need $264.12 in 2010 to match the buying power of $100 in 1980.  [Beauty of Labor statistics, CDI calculator 2010]

2. Healthcare Risk The cost of healthcare has increased dramatically.  Did you know that the average price increase of prescription drugs from 1994-2005 was 8.3% per year?

3. Longevity Risk  This is the possibility of people outliving their financial assets.  Did you know that there is a 63% probability that one person from any given couple (currently age ~65) will live to age 90?  With many people living 20-30 years (or more!) in retirement, it is important to appropriately plan so that your financial assets don’t run out.

4. Excess Withdrawal Risk This is the risk of withdrawing too much money from your investment portfolio too quickly, which could result in running out of money.  Did you know that 70% of people falsely believe they can safely withdraw 10% or more a year from their retirement saving?

5. Market Risk This is the possibility that you have investment losses that may reduce the amount of money you have to live on in retirement. 


In order to retire with confidence, developing a sound retirement plan that addresses these specific issues is integral, instrumental, fundamental.  We will dive more deeply into these topics in the coming weeks.  For now, if you have questions or want to set up an initial assessment of your retirement strategy, contact us.