Investment Risk from the Client's Perspective

Kirby, Fred
December 2005
Journal of Financial Planning;Dec2005, Vol. 18 Issue 12, p42
Academic Journal
• Losses are of greater concern to investors than the promise of long-term returns or even goal attainment; however, they often occupy a low position on the hierarchy of topics discussed between planner and client. • Measuring portfolio loss in terms of percentage of equity decline and units of time is presented as an alternative to more arcane, less intuitively understood, statistical measurements. • Drawdown extent and duration often respond differently to similar portfolio bond allocations. Increasing the percentage allocation of bonds in a portfolio reduces the extent of its losses. Surprisingly, the bond allocation has little effect on the length of time it takes to recover from those setbacks. The inclusion of time in the assessment of losses adds another element of risk. • Unusual drawdown events occur randomly and more frequently than commonly believed. When they are combined with investors' predisposition to short-term trading, the planner is faced with an imposing challenge to maintain client focus on the long term. • When the periodic evaluation of an overall financial plan turns to a review of its investments, confusion may arise between the plan's annual evaluation period and its investment time horizon. A 20-year plan may inadvertently become a series of 20 one-year investment time horizons, further encouraging both planner and client alike to chase short-term performance.


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