Maximizing Returns vs. Managing Risk

Most of our clients are well on their way toward, or already, financially independent (able to sustain their current/desired lifestyle for the duration of their retirement). So our charge as their advisor is to provide the greatest probability of remaining financially independent through both bull and bear markets.

We’ve seen too many portfolios for prospective clients that contain far more risk (i.e. volatility, uncertainty, stock exposure, etc…) than is needed for the investor to reach their financial objectives. The problem, as you can guess, is that the probability of remaining financially independent actually drops significantly when excessive risk is inherent in the portfolio. The reason is that greater risk introduces greater uncertainty. In other words, greater risk actually leads to a much wider range of potential outcomes. So although more risk can potentially lead to a larger estate upon death, more risk can also introduce a greater number of scenarios where an investor runs out of money before death (i.e. impairing financial independence). By reducing volatility we narrow the range of potential outcomes, often increase the probability of remaining financially independent, and reduce our clients’ anxiety so they can continue to enjoy their lifestyle free from financial worry. By avoiding unnecessary risks we also reduce the probability of poorly-timed “sell” decisions near market bottoms, which can destroy an investor’s long-term returns.

This most recent correction, even if not the beginning of a more prolonged market downturn, should serve as a great reminder for investors to revisit the appropriateness of their strategy in the context of their financial goals.
Past performance is no guarantee of future results. Even the most sophisticated projections cannot guarantee financial independence although they can help us understand the effect of risk/volatility in addition to returns on financial independence and assist us in making more informed strategy decisions. This commentary is not intended to be used as specific investment advice.
Always consult an advisor who understands your unique situation, risk, goals, resources, expertise, etc… before making important financial decisions as each investors’ circumstances are unique and require customized advice.