Follow Jason Linkedin Facebook
Email Jason Email
Financial
Aug 15, 2014

Taking On Risk

Sponsored Content provided by Jason Wheeler - CEO, Pathfinder Wealth Consulting

If you could earn and save enough money to meet all of your future financial obligations without taking any risk, would you? 

I think it’s important to understand risk taking.  

I read an interesting research study recently that listed three major risk domains (along with some subdomains within each major category). They are as follows:

A) Physical status: health and safety risk 
B) Lifestyle: social and recreational risk 
C) Livelihood: career and finance risk 

I appreciate this perspective because it allows me to illustrate some very important behavioral issues when assisting clients with their financial decisions.  For example, if someone drinks and smokes regularly, does that mean that they want to free dive 40 miles off the coast? Does investing aggressively mean that you would enjoy a career as a landmine demolition expert? Is it reasonable for an avid skydiver to only feel comfortable investing in certificates of deposit? Is it riskier for an entrepreneur to invest her entire net worth at 27 years of age than it is for an entrepreneur who does the same when he is 67? 

The point of these examples is to highlight the fact that there are substantial differences in risk taking across these domains. I think this topic leads to a very important aspect of determining risk in your investment portfolio. I’m not referring to a particular investment risk but rather investor risk.    

Historically, risk tolerance questionnaires have been the most widely used tool for determining the amount of equity an investor should have in his or her portfolio. Assessing risk tolerance typically involves having a client answer a set of questions that will determine the optimal amount of investment risk. However, there are many types of assessments and the validity and accuracy of the assessment are heavily dependent on whether or not the right questions are being asked. Which questions are the “right” questions? The right questions are the ones that distinguish between the ability to take on risk and the willingness to take on risk. Once we understand the difference, we can complete a gap analysis to assist clients with trade-off decisions. Here’s how it breaks down:  

Ability to take on risk:

Risk capacity: Financial capacity to handle downside results with regards to time horizon, resources and liabilities. 

Risk required: Required rate of return to reach your financial goals given the current financial landscape.  

Willingness to take on risk:

Risk perception: Subjective judgment about characteristics and scale of risk.   

Once we are able to clearly see the differences in the ability and willingness to take on risk, we can perform the gap analysis. The gap analysis overlays a needs analysis with a risk assessment that collectively allows clients to make trade-off decisions. For example, if a client is 18 months from retirement, but she wants to put everything into a speculative investment, trade-off decisions must be made.  She may be willing to risk everything, but in reality, she doesn’t have the capacity to take on that much risk.  

There are some key issues that surface when assessing risk. The two most prominent are:

  1. There are typically two people within a household that frequently have different risk profiles.
     
  2. There are a multitude of behavioral biases that surface when dealing with financial decisions, including: overconfidence, anchoring, hindsight, and the recency effect, which is the tendency to be most influenced by what they have last seen or heard.

As with most financial planning and investing issues, balancing risk is as much of an art as it is a science. You need an individualized overlay on a solid foundation to successfully reach your goals.  
  
The path to financial freedom is not without risk. If you would like to discuss my approach to risk assessment or see it in action, please email or call me.    

Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.

Pcwpath
Ico insights

INSIGHTS

SPONSORS' CONTENT
Jim ellis headshot 10311631058

5 Tips for Tradeshow and Conference Videos

Jim Ellis - Signal
Carolinemontgomery4

KPIs: Finding Your True North

Caroline Montgomery - Adam Shay CPA, PLLC
Christy2

Roof Maxx is a Roofing Disrupter

Christy West - Roof Rescue of Wilmington LLC/Roof Maxx

Trending News

Bankruptcy Filing: Vertex Railcar Owes More Than $45M

Cece Nunn - Nov 19, 2019

Beach & Barn Raises $230K

Johanna Cano - Nov 19, 2019

Group Forms To Oppose Hospital Sale Or Partnership

Johanna Cano - Nov 20, 2019

Wave Transit To Unveil New Downtown Trolley Next Week

Christina Haley O'Neal - Nov 19, 2019

Area Restaurants Honored At Taste Of Wrightsville Beach 

Jessica Maurer - Nov 20, 2019

In The Current Issue

Digital Human Helps Hearts

Hanna is the work of Marie Johnson, managing director at Centre for Digital Business in Australia, Chris Hillier, New Hanover Regional Medic...


Navassa Driven Closer To Major Growth

About 2,100 people live in Navassa, but officials and developers expect that number to grow by the thousands in the next 20 years....


Info Junkie: Adam Hooks

Adam Hooks, CEO of EMS LINQ, shares his top info and tech picks....

Book On Business

The 2019 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

August 26, 2019 Power Breakfast: A Healthy Sale?
WILMA's Leadership Accelerator
2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`