Have you ever seen or done an Investor Risk Survey (IRS)?

Theoretically investor risk surveys are going to pair a person’s risk tolerance with an appropriate portfolio which will help them “stay the course.”

When people try to sell me risk survey software they’re not selling how it will benefit my clients but how it will help me “engage more prospects,” and, “win more business.”

In our practice we see several effects from the use of investor risk surveys:

1. It allows someone not an expert in investing to place a client’s assets in an “appropriate” portfolio without doing much, if any, work.
2. The “risk score” provides a CYA document if the clients proves to be unhappy later on.
3. It creates an anchor for the investor, making them believe they possess some level of conservatism and preventing them from moving to a portfolio appropriate for their actual life circumstances.
4. The clients will ultimately have less money than they would had they invested based on the timeframe for needing the money and in baskets of stocks likely to return the most.

Point 4 is not a phenomenon resulting solely from the use of risk surveys. We see people every week who have less money, sometimes a lot less, than if they had invested more “aggressively,” or, sometimes, they haven’t invested their money at all which can be devastating to their ability to retire.

If I’ve got 25 years until retirement and I invest in a portfolio that’s 80% in the stock market and 20% in bond markets I might get 8% average annual returns.

If instead I put 100% of my retirement savings in the stock market and get 10% average annual returns I’ll have about a 30% higher standard of living at the start of my retirement. Over 25 years there are sure to be some ugly economic times and big drops in the stock market. The portfolio with bonds will drop less but it’s likely you’ll wind up with less money. So which portfolio is more risky?

If we have perspective, and we’re aware, we may go 100% stocks for many years and then shift to something more conservative depending on how far we are from retirement and based on the returns we’ve realized. We wouldn’t make shifts based on what we think might happen, or our fears, or by using some pre-programmed product that gradually steps you into a more conservative portfolio based on your age and not the facts of your life.

If you retire at age 65 your portfolio may need to last 25 years, or longer. It’s a similar story for folks in retirement because if you’re too conservative with your investments your odds of running out of money increase. However, the use of some amount of assets more stable than stocks is generally strongly encouraged for a retirement portfolio. I’ll submit an article next time for The 60-40 Portfolio (very commonly used in retirement) but you can read it now on our website. (Firstandmainfinancial.com)

Unless the world changes to something it’s not, the stock market is likely to keep working as it has for many decades. It goes up and down but over long periods of time it mostly goes up. Participation in it is simply participation in the profits of firms around the globe meeting product and service needs for people.

Please call or email with questions