“There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.”

-John F. Kennedy
 

Risk is defined as uncertainty—the inability to know what will happen.   The riskiness of an investment increases based on the ability to sell it quickly at a market value and how widely the market value can fluctuate.  It is commonly said that higher returns come from taking higher risks.  Although higher returns can be generated by taking more risk, the probability of earning that higher return gets smaller as the risks increase, e.g. collectibles, art, gems.  And, the probability of low but positive returns increases when you invest in low risk alternatives, e.g. bank savings accounts, money market funds.

“Risk tolerance” defines how psychologically open an investor is to decisions which choose between alternative actions, knowing that there is no “certain” outcome.  It is the extent to which a person chooses to experience a possibly less favorable result in pursuit of a more favorable outcome.  Because of the complexity of this concept, there have been plenty of studies over the years researching investor behaviors and decision-making logic.  Important factors include age, income level, education, sex, marital status, personality traits, life-experiences, and even levels of dopamine in the brain.  Many of these studies provide interesting reading with a plethora of statistically significant findings.

The investment industry has taken the studies and created a limited number of investment portfolio structures (usually 3-5 choices) that are suppose to fit you, the investor, based on your answers to some basic questions.  Their recommendations are built on statistical assumptions of whether you are risk-averse, risk- neutral or risk-seeking.  Large financial service firms are not allowed to offer portfolios outside of these few choices.

Now, if you are just a statistic or you believe you should invest the same way everyone else invests, then this method of matching your risk tolerance to the investment marketplace should work just fine.  However, if your life situation changes or you find that you can’t sleep at night because of the gyrations of the value of your portfolio, it is left up to you to re-assess your situation and make the appropriate adjustments.  And what happens if you and your spouse come through as two very different financial risk-takers?

At Holt-Smith Advisors we believe our ability to adequately assess your risk tolerances and design a portfolio to fit you is one of the most important elements of our services.  We understand that there are two key risk concepts that must be addressed for each client: 

1. Risk tolerance—how much risk do you, as the investor, CHOOSE to take; and
2. Risk capacity—how much risk can you AFFORD to take.

Risk capacity determines how much you can afford to lose without endangering the achievement of your ultimate goals. (Do my investments match my goals?).

Before we put together a portfolio of securities, we will discuss your risk tolerance and risk capacity.  We include in that discussion information about your financial situation, how you think about risk and appropriate financial market choices .  We put this assessment in writing and then re-evaluate with you on a regular basis to make sure that your comfort level is maintained.  It’s all about you and your money.  We concentrate our skills on your financial success.