Understanding the goals of an investment portfolio are vital when establishing a client’s risk profile. Many clients ask the common question – How much risk should I be taking? This question can only be answered with another question – What is the goal of this investment portfolio?
When establishing the goals of an investment portfolio a client may want to consider the following parameters:
Different answers to these same basic questions can completely change the goals of a portfolio and therefore completely change the risk allocation and produced rate of return.
As an advisor, I like to think that not only do I manage money as a profession; but I also manage people and their expectations. It is important to have an understanding of the client’s goals or “expectations” before moving forward with their investment allocations. Consider the following scenario:
A new client has established a portfolio goal of a 4-7% rate of return each year. Well if that following calendar year the market index was up 12% and their portfolio was only up 7% they must understand that as a team, we have reached our goal. The portfolio did what it was designed to do. The client must understand that we took a calculated risk in order to produce that 7% return. That specific client may not have seen the full return of the market; however they may not have been taking on the same risk profile as the market index.
For this reason, it is important to establish the client’s goals and expectations initially in order to effectively manage expectations during a possibly volatile market in the future.
Raymond James Financial Services, Inc.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investors may not make direct investments into any index. Past performance may not be indicative of future results.