We Manage Risk For You
There is one rational reason for increasing investment risk – the potential to earn higher rates of return. However, there is no guarantee the higher potential returns will actually be realized.
Risk management should be an integral part of every investment process. For many people this process is more important than investing for higher returns.
Risk Versus Reward
One view of risk is the volatility of your rates of return – the more they fluctuate, the greater the risk. Another view, that has more long-term consequences, is your failure to achieve important financial goals. For example, you fail to accumulate enough assets during working years to retire when you want to and live the way you want to. The consequences of this risk can be devastating, if you have to:
- Defer your retirement date
- Reduce your standard of living
- Take part-time jobs well into your 70’s
- Run out of money late in life
Do the Math
The mathematics of risk are also an eye-opener. Let’s say you have $500,000 of assets and their value declines to $250,000 – you have experienced a 50% unrealized loss. Because you have a reduced asset base, you need a 100% rate of return to get back to your original $500,000. Recovering big losses can take years of positive returns to achieve break-even. Add inflation and expenses to the equation and it can take even longer.
Long-term investment success should be measured by the achievement of your financial goals.
Risk Exposure (Working Years)
You can afford to take more risk in your early and middle working years because you have more time to recover from a bad performance year. Your tolerance for risk gradually declines as you approach target dates. It becomes increasingly important to stabilize the value of your assets.
Our investment team manages this risk for you by providing diversified global investment management services that automatically reduces your exposure to risk as you approach important target dates.
Risk Exposure (Transition Years)
Your single biggest risk is the performance of your assets for the years immediately before and after your target date (retirement year). We call this the Risk Zone. You have accumulated a large amount of assets so you have a lot to lose in a bad market.
For example, the stock market lost 45% of its value in 2008. Imagine the consequences if your retirement date was December 31, 2008 and a significant percentage of your assets was invested in the stock market. It would have taken years to recover the market value of those assets.
Our investment team manages this risk for you by substantially reducing your risk exposure for the years immediately before and after your target dates. The more dependent you are on these assets the lower your risk exposure should be.
Risk Exposure (Retirement Years)
It is a universally accepted theory that your tolerance for risk reaches its lowest point after you retire.
However, that theory may be flawed due to rising longevity. For example, you or a spouse may work for 40 years and be retired for 35 or more years based on your lifespans.
This is an optional GlidePath service, but we believe it will prove to be prudent to increase your risk after your transition years to reduce your risk of running out of money later in life.
The Importance of Diversification
Nobel prize-winning theorists say diversification produces the highest rate of return per unit of risk.
Dr. William F. Sharpe won a Nobel Prize for his Capital Asset Pricing Model that introduced this insight into the relationship between risk and return.
Our global investment strategies emphasize diversification for your investments to minimize risk and produce competitive rates of return.