How do you know you’re managing market-risk?

by brendon on June 2, 2011

Investors in Kansas City and Overland Park, KS need financial planning and investment management that’s goal-driven, controls risk and integrates into a single process. Traditional investing models fail to connect investment plans with an investor’s funding needs.  This prevents advisors from combining a financial plan and investment management service in a way that reflects the personal situation of every client.

My observation and analysis of investor investment accounts (i.e. 401k plans, IRA’s and Roth accounts) is that investors are OVER EXPOSED to risk and unable to reach their financial goals.   Many will consider working longer or part time, deferring Social Security or decreasing in-retirement spending, particularly after market downturns like 2008.

Let’s talk about the control-of-risk as it relates to goal-driven planning and investment management.

In order to control something, don’t you have to be able to measure it?   Absolutely!!  A measure of risk (or volatility) that every investor should know for their investments is “standard deviation”.   This measure is possible to calculate for any portfolio; even ones that contain annuities.  Knowing this measure (and the expected rate of return for your portfolio) gives you a realistic expectation of whether or not your investment management will allow you to reach your goals.  This puts you in control!!

Can you or your current advisor tell you the scientific risk measurement for your portfolio?  How about its expected rate of return?

If you don’t know these answers, is risk being controlled or left unmanaged (ie-not measured)?

The unfortunate reality about unmanaged “market-risk” is it invariably leads an investor to a “loss-year” like 1990 or more recently 2008.  What rate of return did your investments have in 2008?   Was it close to -38.49%?  If so, this was also the rate of return for the S&P 500 in 2008.  Virtually all portfolios I analyze have way too much of this asset-class.

What % of your investments is currently in S&P 500 and other asset classes?  If you don’t know this, is risk being controlled or left unmanaged?

What investors miss in their investments are multiple asset-classes with dissimilar price movements.   When one (or more) goes up—-other(s) should be going down.  (This is “offsetting correlation”.)  Imagine putting together 19 asset-classes with dissimilar price movements like a “structured-market-portfolio”.  70 years worth of asset-class data make it possible to know the expected rate of return AND “standard deviation” (a scientific measure of volatility) for the portfolio.

(Visit this part of my website and be pleasantly surprised at the rates of returns available from 6 asset-classes including the S&P 500:

So how do you invest in a way that scientifically manages risk and is driven by your goals?

Start by working with a Coach who’ll calculate standard deviation for your portfolio, expected annualize return rates, and % of holdings in individual asset-classes.

Next, consider owning “structured-market-portfolios” for the investment management piece of your goal-driven solution.

These portfolios use precise asset-classes to capture the returns of unique dimensions of the market.  These asset-classes, when combined with other asset-classes with offsetting correlations, provide diversification to the portfolio as described in Markowitz’s Nobel Prize-winning theory.   (Interpretation?  This means when one asset-class is going up in value another may also be going down—therefore “offsetting”.)

In creating these portfolios, our money manager uses asset-class funds which, like passive-index funds, do not attempt to predict the future.  In contrast to index funds, these asset-class funds are not necessarily attempting to duplicate an index, but rather capture empirically-proven dimensions of the market which provide unique returns to investors.  Unlike passive-index funds, the asset-class fund focus closely on trading costs.  The funds provide investors with efficient portfolios because they focus on both the return and correlation of specific asset-classes while keeping trading cost to a minimum.

Educate yourself, understand what market rates of return are and capture them with proven investment strategies.

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