3 questions that make creating a retirement investment strategy easier

Posted on May 21, 2018


Crafting a retirement investment strategy can be a daunting task for many people, even when they have a great financial advisor. The best way to help your clients get started is to remind them to slow down and answer three questions.

  1. What is your RISK TOLERANCE?
  2. What is your RISK CAPACITY?
  3. What is your RISK PERCEPTION?

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 trial here.)  

When you break down your client discussion into three easy-to-understand questions, the process seems less intimidating to clients. They will have a very clear picture of the risks associated with their plan and more confidence in you as their advisor.

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This entry was posted in FinancialPlannng, portfolio risk, Industry Advice, Retirement, Risk, Retirement Age