David T. from Worcester, MA asks: Hi Mitch. I’m trying to figure out how to make sure my investment portfolio is in-line with my risk tolerance. I know that I want growth, but I don’t want to endure a 40% or 50% loss like in 2008. I wouldn’t be able to handle it. How does Zacks measure risk and give investment advice to clients based on their risk tolerance?

Mitch’s Response: That’s a very interesting question, David, and one that’s debated often in the investment community. How does one actually define “risk tolerance,” when doing so means trying to box-in a highly subjective concept? You could easily argue that no two investors fall exactly in the same place when it comes to risk. People’s feelings about gains, losses, and volatility are often wildly different depending on their past experiences and future expectations.

Yet, many financial advisors still just default to generic questionnaires to determine how “aggressive” or “conservative” someone should be. At Zacks Investment Management, we go beyond “cookie cutter” investment advice and provide a customized analysis for every client, then use our independent market research and tools we’ve developed to design a customize investment portfolio based on your individual needs.

We believe that our best tool for gauging risk tolerance is to listen to our clients as much as we can as we go through the investment process. Ultimately, the client will inform us if a portfolio outcome is perhaps too volatile or aggressive or not aggressive enough. The open lines of communication we try to maintain with our clients help us collect data throughout the relationship to inform us how ‘comfortable’ the client is with their asset allocation and our approach. Adjustments can be made as needed.

But at the same time, it is also our job as Wealth Managers and Portfolio Managers to educate our clients on what we believe is the optimal asset allocation given their long-term growth objectives and based on the standard of living they want in retirement. In many cases, that means recommending a significant percentage of the portfolio’s asset allocation to stocks, which may push a client to their boundaries for the amount of equity-risk they’re comfortable having.

All too often in the investment industry, we see advisors who might recommend overly conservative investments to risk-averse clients, since those investments aren’t likely to inflict significant losses during periods of decline in the markets. In other words, a strategy is recommended that might make the client feel good, but won’t ultimately produce the growth needed to help the client actually realize their long-term goals. In our view, it is riskier in this case NOT to recommend the riskier investments that offer better chances for substantial gains over time.

The opposite can also be true. There may be some clients whose positive experiences in the markets lead to overconfidence, and/or aspirations for extravagance may lead them to speculative investments or overexposure to equities. These allocation decisions may put them at too high of a risk of large losses, which would also compromise their ability to meet a long-term objective.

There is a delicate balance to be found with each client, and again our goal is to listen as much as possible to help our clients land in the right place.

Finding the right balance and understanding your particular financial situation takes times as you look at your long-term goals, your investment time horizon, risk tolerance and other factors. This can be a difficult process to navigate on your own. So, to help you get a head start, I would recommend referring to our guide, “4 Steps to Managing Your Retirement Assets.” This guide offers insight to help you make critical decisions about your retirement and outlines four simple steps that can give you an added advantage when you retire.  Download your free copy today by clicking on the link below.



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