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
Burrus rob headshot 300x300

Market Manna Now, Market Mania Later?

Robert Burrus - Cameron School of Business - UNC-Wilmington
Carolinemontgomery4

Paycheck Protection Forgiveness Just Got A Lot Easier

Caroline Montgomery - Adam Shay CPA, PLLC
Aarp suzanneheadshot 300x300

Watch Out For Fraudsters Posing As COVID-19 Contact Tracers

Trending News

NCino Stock Soars At IPO

Jenny Callison - Jul 14, 2020

County Releases More Details About Potential Hospital Sale Proceeds

Vicky Janowski - Jul 13, 2020

Plans Change For Harris Teeter Site In Carolina Beach

Cece Nunn - Jul 14, 2020

NCino Shares Expected To Begin Trading This Week

Christina Haley O'Neal - Jul 13, 2020

NCino Raises IPO Value To Nearly $3 Billion; Plans To Start Trading Tuesday

Staff Reports - Jul 13, 2020

In The Current Issue

Virus Changes Economic Development

Economic developers in the region are having to adapt to the ever-changing business environment in the wake of the COVID-19 pandemic....


Dosher Memorial Marks 90th Anniversary

Dosher Memorial Hospital in Southport recently commemorated its 90th anniversary. The critical access community hospital opened June 2, 1930...


New Eateries Still Open Despite Virus

While some restaurants have gone out of business and others are still temporarily closed, others are expanding....

Book On Business

The 2020 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2020 Leadership Accelerator: Virtual Workshops for Real Leaders
2019 Health Care Heroes
August 26, 2019 Power Breakfast: A Healthy Sale?
2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`