Risk Tolerance

Looking at today’s financial markets, “risk-free rate” is one of the easiest, most observable aspects to watch above the waterline.

According to the 1950-era modern portfolio theory, volatility is the most appropriate measure for portfolio risk. It draws down to utilizing the statistical concept of standard deviation; but while this makes the metric mathematically simple and easy to estimate, it also carries some disadvantages.

The reality is, unexpected events will happen; however, preparing for them as much as possible ahead of time is where true financial confidence lies.

The “Margin of Safety” concept can be dated all the way back to the 1930s, first mentioned by American economist and author, Benjamin Graham. In the case of investing, it means you should always leave room for error, or the possibility that your potential outcome may not be precisely right.

When it comes to volatility and finding a desired risk level within your portfolio, here is a handy acronym we at Howard Bailey even use with the families we meet with: C.A.N. you take the risk? (C-Capacity, A-Attitude and N-Need).

How do you factor the unknown into your retirement calculations? Note the key variables highlighted in this article that can greatly fluctuate your retirement projections.

If you had a crystal ball, retirement planning would be much less complicated. Unfortunately, no such thing exists, but there is one thing you can do, which is stress test your portfolio.

Risk tolerance questionnaires can be a great starting point in determining how conservative your retirement investment strategies should be; however, they’re not the main solution.