By Robert O. Graves, CFP® CERTIFIED FINANCIAL PLANNER™
Part of creating a Life Plan for clients requires assessing their risk tolerance. I ask the following question: “How would you feel if you lost 10 percent of your savings because of a market downturn?”
“I think I’d be OK with that”, a client says.
“How about this: if you had $1 million and lost $100,000, how would you feel?”
A blank stare tells me that the 10 percent loss, when put into dollars and cents, is far less palatable. Prior to 2008, many investors didn’t understand the asset allocation risks they were taking. As a result, their portfolios were focused on certain areas while neglecting others. This may have prevented them from having a well-defined, diversified portfolio with alternative investments that may help protect it.
I hope that the recession will help people understand risk better than they have in the past and that they will understand the difference between long and short range planning; the more time you have, the more risk you can take. The opposite is true as well: the less time you have, the less risk you should take. Recognizing risk factors in a tangible way means that more of us will be conservative in our investments, which could benefit us greatly in the long term. Read more