continued Risk is a three-legged stool
Retirement assets declined substantially in the last two bear markets, which suggest workers may be taking too much risk in their investment holdings.
Risk is a three-legged stool, yet most investment tools, data, and so forth are geared toward only one leg, and here lies the problem. The three legs are comprised of a worker’s willingness, ability and need to take risk. It is one’s willingness to take risk that gets all the media attention.
Think back to when you received advice or read about investment risk. You may recall the following question: “What is your risk tolerance?”
Or perhaps you were told what your risk tolerance was based on your age. But did you happen to consider or were you ever advised about how much risk you actually need to take to meet your goals?
The answer to how much risk you need to take can be found in modeling your retirement using probability analysis. You may be surprised to find you can take less risk and still achieve your goals. Think of it this way. If two horses were running in the fifth race at Saratoga Race Course, one with 3-to-1 odds and the other horse with 10-to-1 odds, which horse would you bet on if your goals were met regardless of which horse won?
Risk is not exclusive to investments
We face risks throughout life and at different times we must decide whether to accept the risk ourselves or transfer it—in part or in full.
Think of your life as a risk cycle. Early in your career you face risks pertaining to medical costs, property damages and personal liability. As you move through the cycle you may need to consider family members who are dependent on you and manage the risk of unexpected income loss resulting from a disability or death. Later in the cycle, you may have accumulated more assets, such that you need to reevaluate your personal liability risks, the need to further protect your income and how to manage the risk of paying taxes on your accumulated assets.