Financial Planning and Investment Management: Reality or Illusion?

Jahnke, William
November 1999
Journal of Financial Planning;Nov99, Vol. 12 Issue 9, p34
Academic Journal
This article evaluates the reliability of financial planning and investment management. The concept of investment risk without uncertainty is unrealistic. Although the historical volatility in returns associated with a given investment strategy can be accurately measured, this measurement cannot be claimed as a reasonably accurate measurement of risk for investment decision and financial planning purposes. When a client is shown a graph of the historical distribution of investment returns, the advisor should point out the potential for measurement error. When a client is presented with a table demonstrating a reduction of risk associated with diversification across asset classes, the advisor should point out that the exercise is an illustration. Clients are routinely misled to believe that the illustrations based on historical returns are accurate representations of the future investment risks that they face.


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