Crafting a retirement investment strategy can be a daunting task for many people, even when they have a great financial advisor. The best way for us to help you get started is to slow down and answer three questions.
Risk Tolerance is another way of saying, “where is my panic point?” Often, people will see the market dip and panic and pull their money out. When this happens, they forfeit the opportunity to let the market recover and gain some (or all, and then some more) of their money back. If they think about their risk tolerance ahead of time, they are less likely to make rash decisions. Have your clients ask themselves, “What’s the loss amount that is unacceptable for me?” (Calculate per month, per quarter, and per year.)
Risk Capacity is the ability to achieve your retirement goals no matter where the market stands. Unlike risk tolerance, risk capacity in grounded in fact. Your clients have mapped out goals for retirement (such as spending time with grandkids, traveling, etc.) and know how much money they can afford to lose or gain and still be able to reach their goals.
Risk Perception is a view of how risky the current path is. People don’t experience risk, per se, they experience events. So, they need to know how likely they are to encounter extreme market events, and what they are at risk to lose. A heavy-tail risk calculation model will give you the most accurate insight. (Our SmartRisk tool uses a heavy-tail model. You can get a free white paper here When you break down your retirement planning into three easy-to-understand questions, the process seems less intimidating.
Contact us for a free example of how the tool works.