In a recent article for Forbes, Covisum President, Joe Elsasser, CFP®, addressed common misconceptions surrounding financial risk and the dangers of relying on an outdated financial risk model.
For decades, models of investment risk relied on a normal distribution, also known as a “bell curve.” However, research suggests that the markets do not follow a bell curve. Using the old bell curve to estimate financial risk may give investors a false sense of security or cause them to invest more aggressively than their goals can handle.
Here's an excerpt:
"One of the most important things I’ve learned is that risk is less about what we don’t know and more about what wethinkwe know but really don’t."
Investors need to have a thorough and accurate understanding of risk to make an informed decision. Effectively estimating portfolio risk can help people avoid behavioral mistakes, significantly impacting their bottom line.
You can read the article in its entirety in Forbes.