Market Risk Analysis

Using the Risk Number System

 

 

 

Investing is a Broken Strategy

Human Nature is Against Us

 

Investors by nature tend to buy when things are good, sell when they get scared, miss the recovery, buy back only when the markets seem to be "safe" and repeat the process until broke!

 

Look at the 2007 to 2009 period. In the fall of 2007, traditional risk measures were low and historical returns were at their highest. Human nature led investors to feel "comfortable" it was time to buy.

 

Fast forward to late 2008, early 2009.  The market was "crashing", risk and volatility were both high. Now, human nature says when we see these indicators, it's time to sell, completing the cycle of buying high and selling low.

 

The recent return of volatility to the market has investors once again on edge. In fact, recent studies have shown four out of five investors (80%) have more market risk than they realize. Here's what you can do to make sure you don't fall into the next "human nature" trap!

Watch This Brief Video and Review the Details Below!

Can This Situation Be Fixed

 

Yes, the short term does matter. We all tend to assess risk in current terms. I define risk tolerance with a simple question. How far can your portfolio fall, within a fixed period of time, before you begin making emotion-based, poor investing decisions?

 

All the research in this area points to one clear truth -- investors should be focused on the long term. However, they react to risk in the short term. Emotional reactions to risk are the number one killer of long term financial goals and results.

 

This has led investors to a heightened sense of confusion. Many advisory firms attack this problem by piling on statistics, which only leads to further confusion. Handing someone a 30+ page report on portfolio risk, knowing full well they aren't going to read it, isn't the answer.

Here's Our Solution

 

At PFM Advisor, we believe in simplicity. The Risk Number system uses elegant simplicity to "open the door" for you to understand investment risk. The system provides you with the "behavioral coaching" most investors need to set clear expectations leading to investment success.

 

Historically, most advisors have used risk profiling with their clients. This is an antiquated way of assessing risk and in many instances isn't correct. In fact, recent research has shown 52% of 20 to 29 year old's aren't "aggressive" and 53% of 70 to 79 year old's aren't "conservative".

 

Clients are individuals and must be treated as such. This is the primary reason we use the Risk Number system. It allows use to objectively capture your individual risk number so you can invest fearlessly!

Managing Your Expectations

 

Properly setting and managing expectations is paramount to investment success. Yet, it represents one of the biggest challenges investors and advisors face in today's financial markets.

 

Quite frankly, many advisors are at fault for setting return-focused expectations. They talk about the expected performance of a portfolio based on average returns. In doing so, they create an expectation rarely delivered. In fact, I have been one of those advisors in the past!

 

If you look at the market year over year, the one thing it almost never does is deliver its own average return. It has only hit its exact average once in the last 25 years! An 8% return over the long haul consists almost exclusively of returns above and below the average.

 

Here's the issue. When an advisor tells a client "you should expect an 8% annualized return over the next ten years", the only thing they hear is "8% a year". Unfortunately, the first time the portfolio returns less than 8%, they will have a hard time staying with the strategy long-term. 

The Risk Number System

 

If you invest within the bounds of how much risk you can handle and stay invested for the long run, I have found you will do better than most other investors and greatly improve the odds of meeting your goals and objectives. This can only be accomplished when you understand risk in terms of real investment dollars.

 

The Risk Number system is based on a sound mathematical foundation and years of behavioral economic studies. Built on the underlying concepts of risk, variance and standard deviation, the system is easy to understand as everything is expressed with risk numbers in a zero to 99 scale.

 

It starts with your personal Risk Number, followed by asset risk numbers which lead to your portfolio Risk Number. We begin with risk tolerance as defined above. Then you complete the process through an on-line questionnaire where YOU define the range of returns you're comfortable with, in real dollar terms, which ultimately determines your personal Risk Number.

 

The most powerful aspect of this approach is our ability to construct (or realign) your portfolio and measure it's risk on the same scale as your personal Risk Number. We have found this approach gives you a much better understanding of the risk/reward position of your investment portfolio and the nature of investing in the financial markets.

Taking the Next Step

 

If this approach sounds like it makes sense to you, the next step is to find out what your personal Risk Number is. The questionnaire process is simple and can be completed entirely online. In addition, you're not in any way obligated to go any further than finding out your personal Risk Number.

 

Click the button below and you'll be taken to the Risk Number questionnaire page with a video demonstration and written, step-by-step instructions. Once you've reviewed the instructions, click the start button and the questionnaire will open in a separate window so you can refer back to it if necessary.

 

When you've completed the questionnaire, your personal Risk Number will be displayed. If you don't fully agree it fits your risk point of view, you'll be able to go back and make adjustments. Only when you're satisfied the parameters are completely in your comfort zone do you click the "finished" button and get your final personal Risk Number.

 

Go ahead and click the button below and review video demonstration and instruction page. Then, when you're ready, take the test and get you personal Risk Number today. If have questions, click the blue FAQ button and the answers may be thereMarket volatility is here to stay and you need to know exactly what risk level is right for you!