Saturday , 27 May 2017


A Portfolio Risk Assessment Should Include More Than Just Your Investable Assets – Here's Why

Often when we hear about “investment portfolios” our minds go to stocks, bonds, cash, ETFs and mutual funds. We think about our 401(k) and IRA. In other words, we think about investable assets, and we pretty much stop there but I would argue that there’s more to your portfolio than just the securities in your brokerage account. [Let me explain further with a few examples.] Words: 500

So says Sue Thompson in her most recent post* at http://isharesblog.com/blog entitled Tuning in to Your Total Portfolio.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Thompson goes on to say, in part:

The reason to look at portfolios as a whole is to assess the overall risk/return characteristics in order to determine whether one’s financial goals can be met. Because of that, it’s important to take a broader approach when assessing your total portfolio and the risks it may be susceptible to.

Housing is a great example. Anyone who owned a home in the hot real estate market of 2004-2006, and then suffered the dramatic decline in value in subsequent years, perhaps started thinking of their house as part of their overall portfolio but I would argue that doesn’t go far enough.

Let me give another example. Let’s take a couple that seems like they’re doing everything right:

  • have purchased a home that they can easily afford the mortgage on.
  • have maxed out their 401(k) contributions,
  • have “rainy day fund”,
  • have limited exposure to student loan/credit card/auto debts and
  • are currently saving 10% of their after tax salaries in additional long term savings,
  • have started a 529 plan for their baby.
  • have well diversified investments, representing domestic equity, international equity and some fixed income, generally in the weights that are commensurate with market cap weighted indices.

They’ve appropriately planned for the potential risks to their portfolio… or have they? Now, let’s add a few more salient facts.

Let’s say that one spouse is a petroleum engineer working for an energy company, living in an area of Texas that is heavily dependent on the energy sector. And that the other spouse is a CPA, specializing in oil & gas taxation. Just by adding these facts, we instinctively know that if oil prices drop to $30 a barrel, this couple’s financial future could be derailed. By defining their portfolio too narrowly, they failed to see some of the biggest risks to their financial future.

HAVE YOU SIGNED UP YET?
  • Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.
  • It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.
  • Join the crowd! 100,000 articles are read monthly at munKNEE.com.
  • Only the most informative articles are posted, in edited form, to give you a fast and easy read. Don’t miss out. Get all newly posted articles automatically delivered to your inbox. Sign up here.
  • All articles are also available on TWITTER and FACEBOOK

Your financial advisor should be assessing these risks for you and determining whether a different asset allocation is warranted. In my opinion, this is one sign of a good advisor, and something I’ve asked about in my own search for a financial professional.

Perhaps in the case of our hypothetical couple, their advisor could suggest they invest none of their financial assets in the energy sector and perhaps even overweight investments in areas that are negatively correlated to the energy sector.

Conclusion

Whatever the investment outcome, taking the step of identifying your “total portfolio” and its inherent risks is one strategy that can keep the financial surprises at bay.

*http://isharesblog.com/blog/2012/09/17/tuning-in-to-your-total-portfolio/

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. What You Need to Know About Financial Advisor/Planner Fees

investing6

Understanding how financial advisors get paid and what your advisor fees are will help you make smarter decisions about your money. Here are a few of the different ways financial advisors get paid and what you need to know about advisor fees. Words: 538

2. Want a Secure & Enjoyable Retirement? Here’s Exactly What to Do

retire

Retirement planning is more intimidating for most than any other personal finance topic. We know we should be saving but not how much. We know it’s important to use a tax-deferred account but not which one. Most devastatingly, we often leave saving itself completely up to chance trusting that we will have enough willpower to set money aside for 30-50 years. Luckily, finding a secure and enjoyable retirement need not be mysterious. Here’s exactly what to do.

3. Can I Invest in Physical Gold & Silver in My IRA?

gold-silver

I have an IRA. How can I invest in gold and silver? It is quite easy! Yes, I am talking about actual physical gold and silver, not “paper” gold, or certificates, or paper promises. Words: 621