November 22, 2013

Least Risk Investing

Many advisors believe that your portfolio should be as risky as you can tolerate. They’ll hand you a risk-tolerance assessment, score it, and then set-up your portfolio so that you experience the maximum level of volatility that you can (theoretically) tolerate. They then offer, as part of their “value proposition,” to help you stay the course during times of severe volatility (e.g., bear markets).

While this approach may result in higher portfolio values over the very long-term (because risk and return are closely related), it can actually diminish your odds of meeting your most important financial goals. It is also an unnecessarily painful approach: It’s analogous to going to the dentist for a root canal, being tested for your highest level of “pain tolerance” and, then, being given just enough pain medication so that you experience as much pain as you can tolerate.

At Planvesting, we believe there’s a better way. While some investors may, indeed, need to take as much risk as they can tolerate, many others can take significantly less risk and still have confidence in meeting their most important financial goals. To quote from “The Book:”

Least risk investing is about attaining your goals with as little risk as possible and then, once you’ve arrived at your financial destination, decreasing your risk even further, if possible, to protect what you have.  Especially for affluent investors, least risk investing is not about maximizing the chances of getting richer, it’s about minimizing the chances of becoming poorer.  It is a sad paradox that those who can afford to take the most risk (the affluent) and who are often advised to do so, are also the ones who most often should take the least risk.


A “least risk” approach also looks to eliminate (or, at least, reduce) other unnecessary risks from your portfolio – risks that don’t have positive expected returns over the typical investment time horizon. Such risks include:

  • Using expensive, actively-managed funds,
  • Possessing high concentrations of individual stocks,
  • Investing in long-term, low-quality bond funds,
  • Ignoring the benefits of factor-loading,
  • Attempting to time the market, and
  • Employing high-cost advisors.