How Much Investment Risk Are You Taking
with Your Portfolio?
All Investments Come with Risk
There are two challenges for every stock market investor with regards to risk: (1) Identifying the Risks that are present (and actually matter) and (2) Managing those risks.
Investment risk isn’t all that easy to spot much less quantify. Your human brain isn’t wired for that. The tendency is to take market action in the recent past and expect it to continue. At certain inflection points that can be … well … a problem (to put it kindly). You don’t see the risk until it’s too late and you’ve already lost (a lot of) money.
Which Risk Matters
There are many different types of investment risk – some more dangerous than others – but they tend to get rolled up into a single generic term – “Volatility Risk” which describes the difference between the returns you expect to get and what actually happens over time.
While almost universal in it’s use by investment managers, Volatility Risk is a poor proxy for the kind of risk that matters to investors. It equally weighs Upside and Downside risks, but Upside Risk isn’t a problem for most people.
Would you complain if you made more money than you expected? Me neither. It’s the Downside Risk that gets people upset when it’s realized.
Because most traditional portfolio designs use “Volatility” risk, they mute gains as they try to manage potential losses. Getting lower but more consistent returns with less volatility would be OK if clients and investors were completely rational, but you’re not. You’re human and that means prone to emotional reactions.
Even more challenging – your performance expectations are heavily influenced by what’s going on around you. Think of a 10% loss on your portfolio in the context of two different scenarios: (1) the market gains 32% (2013) or (2) the market loses 38% (2008). If the market is doing well, you want to do well and that 10% loss is upsetting but that same 10% loss looks pretty good compared to a market where everyone else is losing a lot of money.
The DPT - The Happy Loss Limit
There IS a limit to this “Happy Loss.” You’re likely OK with losing some money as long as others are losing more, but only up to a point. That point is your Draw-down Pain Threshold (DPT) – the amount of loss that regardless of what your neighbors are experiencing would cause you to lose sleep overnight.
Typically the DPT is between 12% and 20% but each case is different. Effectively managing investment risk means avoiding “the Big Loss” (which can devastate your family’s financial future and make your own life miserable).
The Next Step
Our primary focus in managing client portfolios is to manage downside risk (especially exposure to the Big Loss) and we do it without significantly affecting upside potential. These are techniques that are beyond the scope of this article, beyond the abilities of most retail investors and frankly ignored by many investment advisors we’ve met.
The first step for you is to understand the amount of investment risk exposure (especially downside risk) built into your current portfolio and to make sure it matches both your current expectations as well as your Draw-down Pain Threshold (DPT).
In 4 out of 5 cases, it won’t.
After that, you can have a conversation with your investment manager about where the bad risks are in your portfolio and how those risks are being managed. Does he/she have an exit strategy for the next market correction? If you don’t get a response that you like in that conversation, it’s time to change advisors … even if that means firing yourself.
How Much Risk Are YOU Taking?
Risk Number for an Average Non-Client User
Risk Exposure for an Average Non-Client User
Non-Client Users Exposed to More Risk Than They Expected
If You Do One Thing … Avoid the Big Loss!
Yes, making money with your investments is important…
… but Not Losing Your Life Savings lets you sleep at night.
Our Investment Process
Step 1 - Take the Risk QuizTake a 5 minute quiz that covers topics such as portfolio size, top financial goals, and what you’re willing to risk for potential gains.
Step 2 - Get Your Risk NumberBased on your responses to the five minute quiz, our software will pinpoint your exact Risk Number to guide our decision making process.
Step 3 - Review Your Current InvestmentsThen we review your current portfolio and run it through the same Risk Number calculation. It turns out 4 out of 5 people have more risk in their portfolios than they previously realized.
Step 4 - Align Your Portfolio to MatchWe’ll craft a portfolio that aligns with your personal preferences and priorities. We use Riskalyze technology which empowers us to make sure the Risk Number of your portfolio matches your personal Risk Number, allowing you to feel comfortable with your expected outcomes.
Step 5 - We Stress Test Your New PortfolioStress tests illustrate how your proposed portfolio would have fared through various market events over the past 8 years, including the financial crisis and recovery so you can understand the potential gains and losses we should expect over time.
Step 6 - We Monitor Your Portfolio DailyYour nest egg is important and nobody likes surprises. Somebody needs to keep an eye on your portfolio but you have a life to live (and maybe a real day job). We monitor your portfolio every day for risk exposure shift and will rebalance as needed … and we’ll send you an email or video report for the changes we made and why we made them.
Does Your Investment Advisor Do This For You?
We put this much care into every client portfolio – no matter how big or small.
It all starts with a simple Risk Number assessment.
Additional Service Features
(at no additional cost)
Retirement MapMeet Your Retirement Goals – Before we’re finished, we’ll also review your progress toward your financial goals by building a Retirement Map. When you’re done, you’ll fully understand your chance of success, and what needs to be done to increase it.
See Your Investments ClearlyAll the important information about your portfolio is available to you 24 x 7 through our secure client portal. Performance data, trading information, our communications with you. All are at your fingertips through your desktop, tablet or smart phone.
Access To Your Advisor on Your TermsWe’re where you are: home, work or in your car. You can call, email or video chat and we’ll respond, usually within an hour … and we keep office hours in the evenings and on the weekends when you’re not at work and have time to think about your personal finances.
Real People with Great TechnologyYou’re a human with real feelings, goals and fears – all of which drive your investment decisions (often not in a way that helps you). You need an advisor who appreciates you for all that humanness. We just happen to have some really great technology to do the number stuff.
No Minimum Account SizeRegardless of how much you have to invest, you deserve an investment advisor who respects your portfolio for what it represents: years of saving, sacrifice and self discipline. After all, it would have been a lot more fun to spend that money (if you could get past the guilt).
Your Best Interests Come FirstWe adhere to the Fiduciary Standard of Care. What this means is that we put your interests ahead of our own. We do investment management as a service. There are no product sales or hidden agendas. Everything is transparent and all conflicts are disclosed.
The Legal Stuff:
ALTUS Wealth Solutions is a Virtual Registered Investment Advisor firm (registered with the State of California) created in late 2007 (proof that market timing is not our specialty – then again, nobody can time the market). We are NOT affiliated with any broker or dealer. We provide financial planning and investment management services for a fee, are not paid to make any specific recommendations and do disclose any and all conflicts of interest with the advice that we give.
All advisors and staff of ALTUS Wealth Solutions adhere to the fiduciary standard of care. We make every attempt to do whatever is in our clients’ best interest and put those interests ahead of our own.
John Buerger is the founder, owner, Chief Investment Officer and financial planner. John is a CERTIFIED FINANCIAL PLANNER™ professional with a BA in Economics from Middlebury College and a Masters of Science in Financial Services (MSFS) from the American College in Bryn Mawr, PA.