Our belief at Riskalyze is that people need to be invested within the bounds of their risk tolerance. That’s a contrarian viewpoint to many advisors, who believe that the needs of the client’s comprehensive financial plan should drive the amount of risk that they take in their investment portfolio.
"Yes," they say, "clients may take larger losses in some years, but if they stay invested over the long term, it’s a better approach."
The problem with that theory is that it hasn’t worked. The data shows that investors tend to react emotionally when the markets fall and order their advisors to sell or reduce their risk at exactly the wrong time. Then they wait until the market “feels safe again” (in other words, the recovery has already occurred), and then they buy back in at the high.
Rinse and repeat for thirty years, and that will be a disastrous retirement.
The Riskalyze Approach
Risk Aware Advisors believe that the better approach is to invest clients within the bounds of their risk tolerance, which creates a far higher assurance that they will stay invested for the long term.
Then they use the Potential Annual Return for the portfolio to drive the annual return in the client’s comprehensive financial plan.
What happens if the annual return isn’t sufficient to meet the client’s goals?
Rather than driving return based on the needs of a client’s plan, Risk-Aware Advisors prefer to know early on if a client’s risk tolerance won’t allow them to meet their goals.
That allows a frank conversation with the client about making adjustments to the plan to fit reality: either delaying retirement, increasing contributions or taking down the retirement income level.
And it’s possible that, when confronted with the incompatibility between their risk tolerance and their goals, the client proactively decides to take on more risk, which serves as an effective tool for the advisor to stay within client expectations and keep the client invested during future periods of volatility.