Imagine if determining the amount of risk that’s appropriate for your portfolio was as easy as picking “1” or “2” at the eye doctor.
Jim* heard about us through one of our clients and came in for a meeting to find out what we could do for him. His main concern when he came to see us was that the market was overheated. While he liked the positive returns he was seeing in his portfolio, he was concerned about his potential exposure to losses.
We sat down with Jim to do a risk analysis using a set of user-friendly questions that structured much like an eye doctor’s queries of “Which is better 1 or 2?”
Jim’s current advisor, who is based in Orange County, where Jim had just moved from, had been advising him to stay the course with his current market positions and enjoy the portfolio gains. At the end our conversation, however, we found that staying the course was the last thing he should do. His portfolio didn’t remotely match his Risk Number.
Risk number, you ask?
We assign our clients a Risk Number via Riskalyze, a risk-alignment platform based on Nobel-prize winning economic work. The creators of Riskalyze discovered people have a much easier time assessing the investment risk they’re willing to take if they imagine doing it over a shorter time span. Based on this discovery, they developed technology to mathematically pinpoint a client’s Risk Number.
Using Riskalyze, we assigned Jim a Risk Number of 33, meaning that within a six-month time frame, he could tolerate a portfolio that had an upside of 9 percent and a downside of no more than 5 percent.
Next we looked at Jim’s portfolio. His investments, it turned out, had a Risk Number of 85, which was far above his actual risk tolerance. What this meant was that, while this portfolio would outperform the S&P 500, a 2008-level market correction would kill of half of his portfolio value, ten times more loss than he could reasonably tolerate.
With this data in hand, we suggested we optimize Jim’s portfolio to align to his risk tolerance. For Jim, having a local advisor who could hear his concerns and manage his portfolio accordingly, sounded like an excellent plan.
After Jim became our client, we ensured he had a tax-friendly portfolio tailored to his Risk Number. We also established loss guardrails that trigger a meeting to assess whether selling any of his positions is in order. Every quarter, we meet with Jim, and, because both markets and clients’ lives can change quickly, we send Jim a monthly email inviting him to check-in with us if he’d like. This allows us to quickly understand how Jim is feeling about the markets and address his concerns. Jim really likes this communication because it gives him the opportunity to know exactly how well his portfolio is working on his behalf. In short, it gives him the confidence to participate in the upside of the market without being afraid of the downside.
What’s your Risk Number? Click here to find out!
If you want a more in-depth analysis of how well you and your portfolio align, feel free to schedule some time with me to find out. You can reach Brandon at 928-460-0972 or firstname.lastname@example.org.
* Name and details have been changed to protect client confidentiality.