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Thursday, July 14, 2011
What is your risk tolerance? Run for the hills.
“In regards to your money, what is your risk tolerance?” That question was asked to me by an advisor who was setting up a retirement plan for me at my first job out of college. Based on the answer his clients gave, the advisor would suggest a fund that was conservative (low return/low risk), moderate (average return/some risk) or aggressive (potential high return/high risk of loss). Since then a number of clients have told me that they have had advisors ask them the same question in developing their plan. Often this question puts people in an uncomfortable and potentially dangerous situation. The question does not take into considerations a person’s individual financial situation (debt, lifestyle, dependent obligations, tax implications, retirement goals). Secondly, the question itself suggests that if one wants a significant return on their savings and investments, they need to accept risk of loss as well. That is simply not true. At the time I was much younger and I figured that was as gutsy as a river boat gambler, so I told the man I had a high risk tolerance. In hind sight I wish I had known to tell him that I never want to receive a statement showing a lost dime and I want a minimum of 8 percent return compounded annually. At the very worst, an investment receiving an 8 percent minimum compound annual return will double every 9 years. That describes one of the investment products for which many of our clients qualify. One doesn’t need to run the risk of striking out trying to hit home runs if they have the ability to get on base every at-bat.
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