Desire & Ability- What are the Risks?
About the author: Trini Guillen is dedicated to helping clients achieve financial freedom. Trini has passed the Series 65 examination and has a Bachelor of Science in business administration with a focus in finance. He has spent 21 years in the financial industry. His previous experience includes trade system research and development, portfolio management, due diligence and trade execution.
Desire & Ability- WHat are the risks?
If you’re still working, then this blog article will probably not be the most interesting article for you. But, bear with me for this short read and maybe there is a takeaway for you in here after all. If you’re older and nearing that retirement age, or already in retirement. then there will be something in here to at least consider.
If you’re working with an advisor, did they ask you how much risk you’re comfortable taking with your retirement accounts? Hopefully they did ask that question and whether you knew it, you gave your advisor an idea of what your desire, or appetite, for risk was at that time. This is a good thing because you’re saying that you are okay with a certain level of market downside movement and when you’re comfortable with a certain level of volatility, you are more likely to stick to your investment plan.
However, if you’re looking to take distributions from your portfolio and those distributions are necessary to maintain your lifestyle in retirement, then this risk evaluation is only half the solution necessary to help ensure that you’re properly positioned. What am I talking about, you ask? Well, think of it this way – let’s say your portfolio is like your car, and you feel the need for speed! Would a crash scenario disrupt your ability to maintain your lifestyle long term?
This is a crucial question to ask. Let me explain this with an example, we’ll call him David. Well, David loved his aggressively positioned portfolio. He did not care that it lost 53% in the financial crisis; he had no emotional attachment to market movements. When running a stress scenario for his income plan (I’m a big believer that a properly designed income plan can determine one’s investment plan’s risk development, but that’s another blog topic for a later day), and he found that if he sustained another 2008 event or worse, then his financial security would be destroyed. Furthermore, the returns needed to sustain his portfolio’s viability could be achieved through a moderate allocation and the aggressive position was unnecessary.
After he realized the effect his current risk could have on his financial future, he was happy to now pump the brakes on his asset allocation and chose to cruise through retirement with slightly lower returns. If you’re still in that accumulation phase in life with a dedicated contribution plan, then you should be quite comfortable with higher speeds because your ability to generate the income is really your largest asset. In retirement, however, higher returns are nice, but the potential downside events may erase your ability to maintain that lifestyle you planned for.