Only You Can Prevent Portfolio Fires

Know your comfort level when it comes to risk.

Everybody wants to make money, and nobody wants to lose it. Seems simple enough.

Unfortunately, there aren’t many financial vehicles that can offer that guarantee. Typically, to make enough money to live on in retirement, you must take some risks.

But if your financial professional is truly looking out for you, he’ll put as much focus on managing that risk as he does on helping you get the best returns.

Most planners will talk about risk tolerance and ask you questions about your age, your income, your net worth and when you hope to retire to determine your ability to handle market volatility. But there should be so much more to it than that. My firm has an acronym for our process – CAN: Capacity, Attitude, Need. You really can’t put together a workable financial plan without considering all three. And it breaks down like this:

C is for Capacity

This is the nuts and bolts of how much risk you can afford. Capacity in this context is your ability to absorb a loss without it affecting your standard of living in retirement. It’s an important part of the risk conversation – but if you give it too much weight, it can throw things off. For example, an adviser might put a client into a portfolio he’s not comfortable with just because he has a high net worth and, in the adviser’s opinion, could handle a loss. Or he might put a younger, yet risk-averse individual into a more volatile vehicle because he/she should have “time to bounce back.”

Often, a client asks for a “conservative” portfolio, but that’s a subjective term. When you’re talking to your adviser about risk, be specific. Think in terms of dollar amounts: How much money are you really able to have at risk if there’s a market downturn?

A is for Attitude

Once you sort out your capacity for risk, you still have to do some soul-searching and determine how you feel about losing money. This isn’t about what you can afford; it’s about your emotions. Do you have the disposition and desire to pursue a more favorable outcome – a higher return – at the risk of a less favorable result – a terrible loss?

At my firm, we use a software program called Riskalyze, which is based on behavioral psychology and how people make choices between certainty and chance, to help clients drill down and assess their true feelings. It assigns you a number from 1 to 100, with 1 being the most conservative approach and 100 the most volatile. Then, we take a person’s current portfolio and see how that fits with their Riskalyze score, and adjust it if necessary. And it’s usually necessary if they haven’t taken risk into account before.

A couple came in recently, and their score was a 19 out of 100. That’s ultra-conservative. But their current portfolio was a 55. That number might seem pretty middle of the road for some, but for them, the loss in a market downturn could be devastating.

N is for Need

Finally, it’s important to look at how much your financial vehicles must return to meet the needs of your income plan. In some cases, individuals might have to risk a bit more than they’d like to make up for a shortfall in their nest egg. But we also see people who are risking more than is actually required to make their retirement plan work.

For example, if you need a 3% return to support your income plan, and you decide you want another 2% for growth, you can limit your risk to vehicles that will provide a 5% return. Why target a return of 7% to 8% if the risk required could negatively affect your portfolio?

One key to retirement planning is this: If you have enough, don’t ever risk not having enough. You’re saving and investing your money for a purpose, and that purpose is to support your lifestyle when you aren’t working anymore. Getting there isn’t the end of it – you have to make that money last.

Navigating your way to and through retirement is a little like driving your car across the Golden Gate Bridge. You would never make that journey in the fog if there weren’t guardrails to keep you from falling over the edge. Managing volatility can be like putting guardrails on your portfolio to keep you heading in the right direction.

If you feel uncomfortable about your current financial strategy – or if the worry is keeping you up at night – talk to your financial professional about the CAN approach. It could make all the difference.

Kim Franke-Folstad contributed to this article.

Investment advisory services offered through AE Wealth Management, LLC (AEWM). AEWM and Heise Advisory Group are not affiliated entities. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to protection benefits or guaranteed income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

About the Author

Ken Heise, Investor Adviser Representative

Co-founder and Financial Adviser, Heise Advisory Group

Ken Heise is co-founder and president of the St. Louis-based Heise Advisory Group ( He is an Investment Adviser Representative and a Registered Financial Consultant, a designation awarded by the International Association of Registered Financial Consultants to advisers who meet high standards of education, experience and integrity.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

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