To: The WSJ Editors
RE: to the feature "What's Your Tolerance for Investment Risk? Not Probably Not What You Think
Things not worth doing are not worth doing well or as Gypsy Rose Lee stated, 'things worth doing are worth doing slowly.'
Risk tolerance measures have become 'ala carte du jour' in personal financial planning - putting the cart before the horse.
Context context context - precedes and frames risk tolerance - which means the goal quantified, prioritized (with tradeoffs) comes first - then risk tolerance is but a clarifying test.
In particular, one could have an geologist - a wildcatter by nature. He tells the planner (this is a true story) he likes to take risk. But in the context of his personal financial goals - he already has made his goals - so why sacrifice what one needs for what one doesn't need? (It usually winds up in 'bleeding.') The question for this individual - was becoming 'independent' of his independent business - conversion of asset composition to make the goals (slow down prior to retirement and then retirement - in phases). It anything - to make this client's goals - required a tradeoff of lower volatility meaning lower rates of retire - rather than going with his 'risk tolerance' from the outset - drill baby drill
Context, context, context.
Of course, one could argue -- well, that's all well and good for one who has made his goals - wrong. The question is where is one on the glide path - to make the goal(s) and what retrofitting rates of return and 'risk' (so to speak) can be endured or is necessary.
The framework is the goals - the amount, the duration, the start, the after tax after inflation 'risk adjusted' rate of return required - and then risk tolerance - in context - with tradeoffs - is a check point.
jim schwartz, author ENOUGH(sm),
Trust Me, I'm Not A Veterinarian
co founder NAPFA
1985 (Fee Only) Personal Financial Planer of the Year
RETIRED (& recovering) Personal Financial Planner