Have you ever walked into a Financial Advisor’s office and taken a risk tolerance questionnaire? These tests ask you basic questions and then classify you into groups: Conservative, Moderately Conservative, Moderate, Moderate Aggressive and Aggressive. I have not met anyone who can give me a simple explanation of what each of those classifications means.
At Cobalt Private Wealth, we use a quantitative tool built on a Noble Prize winning behavior study to determine our client’s risk number. This tool assigns you an actual risk number from 0 to 100. If your number is a 60, that is similar to the speed limit that you are comfortable driving. We then compare your risk number to the risk number of your portfolio. If your risk number is 60 and your portfolio is 85, then it is similar to you driving 85 miles per hour when you are comfortable. In this type of situations, you get incredibly nervous whenever the market experience even the smallest amount of volatility.
Conversely if your risk number is 60 and your portfolio is a 30 you may be giving up potential returns that can result in a shorter time table to attain your financial goals.
Regardless of your risk number, it will show the potential returns and declines of your portfolio. Why is that important? Few things in life make us as emotional as money. When we are at either extreme of the return spectrum (big move up and the fear of missing out or temporary decline and the fear that this time is different and I will end up losing everything), we tend to make emotional decisions. Most of the time investors make a decision influenced by their emotions it is to the detriment of their portfolio’s performance.
Study after study have shown that individual investors who are influenced by their investment emotions have returns that are half of those generated by investors who are able to set their emotions aside, recognize that volatility is going to happen and are able to ride the weekly roller coaster that is the stock market. If you are interested in reading about these types of studies, then google “Dalbar Study”.
Your risk number can be calculated by simply answering about six questions related to the performance of your portfolio and how you view risk and return. Call me at 719-332-3863 and I will be able to tell you your risk number in about five minutes! We can then enter the recommended portfolio and determine whether or not you are on track of attaining your financial goals such as retirement or funding college education or buying a home.
