Risk Return Tradeoff – MemberMinds | PlanMember Financial

Risk Return Tradeoff – MemberMinds | PlanMember Financial


Hello, I’m Tom Nugent and I’d like to welcome to MemberMinds. When it comes to investing an individual’s ability to tolerate investment risk can vary. When it comes to accumulated wealth some investors may have a high tolerance for risk while, for others, risk is to be avoided at all costs. It’s not just personality that determines one’s approach to risk. Factors such as age, life expectancy and retirement goals will also impact how investors should approach the concept of risk and return. The risk-return tradeoff is a core concept of investing and should be well understood by individuals saving for retirement. Today we’ll discuss risk-return tradeoff with Karen Waite, Compliance Analyst for PlanMember and she’ll be explaining more about what the risk-return tradeoff is, how risk and return are correlated and important aspects to consider when evaluating your personal risk tolerance. Karen, Welcome to MemberMinds. I’m happy to be here Tom. Let’s start out with the question about what risk is. Well when we speak about risk we did find that as a potential, or a chance, that we may lose value in a particular investment and then on the flip-side we have return which is an opportunity to gain off of a particular investment. Whether it be through capital gains dividends or income. It’s also important to note that when I said potential I’m emphasizing potential there’s no guarantee as with any investment there is a potential for some loss if not total loss. So then there’s some relationship here between risk and return? Yeah, there’s definitely a correlation between risk and return someone say it’s a positive correlation I’m going to say it’s a relationship. For example, with a high risk type of investment there is the potential in there historically is a higher return on that type of an investment as with a lower risk investment such as a bond or money market fund you’re looking at much less of a return on that type of an asset, more conservative. And how would you describe let’s say, the difference in risk between a stock portfolio and a bond portfolio? That’s a great question. When you’re speaking about stocks you’re generally speaking about an investment that has volatility and that’s an important factor in risk and return. When you say the word risk you’re speaking volatility or potential volatility. So with a stock you have volatility the market, more of a market risk and you’re also looking at an investment that may have a short-term or frequent swings in price and that would be considered an investment that might be more appropriate for an individual who might be younger and newer into the market than a such as a bond or a money market fund which are considered typically low risk and long-term investments. So you’re looking at short-term versus long-term and time is the factor in that. So then you’d say that it’s someone who’s young has the ability to take more risk to get a higher return to save for retirement than somebody who is nearing retirement? Well that depends Tom. I mean just because you have individuals that might be in identical stages in life doesn’t mean that they have the same ability to take on risk nor does it mean that they have the personality type that would want to take on risk so you have to look at various factors such as income. It’s very important to look at what are their retirement goals they may have different goals for retirement. They may have different requirements for retirement income. So essentially you might be able to find someone who is nearing retirement that has a very low risk tolerance perspective and that would be willing to take more risk in own more stocks and bonds at that stage of life. It’s dependent upon your life circumstances and your income and your ability to take on risk and I would always consult a professional to take a full look at what it is that you may need for your retirement for making that type of a decision, but generally somebody in retirement is gearing down towards more of a conservative type portfolio and conservation of capital and that’s what we would look at through compliance standpoint. So what you’re saying about the risk tolerance of someone who is nearing retirement. I would say the risk tolerance of somebody nearing retirement would gear towards a conservative type portfolio. Are there any other characteristics of this risk return tradeoff that we should be aware of? Absolutely, I can think of three key factors: your suitability, timeframe and liquidity needs. Very important to look at that. Everyone has different ideas of what their suitability might be. Everyone has a different time frame for investing and absolutely you have to look at what are your liquidity needs: do you need money right now or do you need money in ten years. I’m not really clear what this idea of suitability is. Could you explain a little further? Suitability would be looking at the overall picture of an individual and their financial needs and their financial health and their welfare before making a decision as to what they would invest in. For example I wouldn’t take an 80 year old individual and put them in a volatile stock such as a high-tech stock, at this point, depending upon what their entire portfolio looks like you want to do more conservative. Karen, thanks for being with us today and thank you for joining us that MemberMinds. You can find more information about the risk-return tradeoff on your PlanMember financial professional’s website. And remember, the future favors the prepared mind. See you next time.

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