Quantifying Risk: How much is enough?

June 13, 2011by Kevin Painter0

We met with a client last week that had recently inherited a large sum of money.  This inheritance has the ability to provide financial stability for her and her family for many years to come.   The first question we asked her was “How much is enough?”  We assumed that this sizeable gift from her parent’s would be enough for her to say grace over for the next 20 years.  She agreed that it was which then shaped the conversation about risk.  We built an income portfolio of tax-free and tax-advantaged bonds that will provide her with income that she can enjoy.  If she has enough, why would she want to risk not having that amount at some point in the future?

Investors are constantly possessed by the emotions of greed and fear.  They usually experience these feelings at the exact polar opposite time that should be.  Investors paralyzed by fear often begin their investment journey looking at the risk profile on an investment (CD, annuity, bond) rather than the return that you can expect from that investment over a period of time.  Other greedy investors look at the return opportunity (that new construction condo in Florida that you wanted to flip in 2005) rather than the risk.   Risk manifests itself in many forms.  But before you look at how much risk you should take, it’s imperative that you determine a purpose for the money you want to invest.  Whether saving for a child’s tuition, that next Alaskan cruise, or building up a nest egg to crack in retirement, before you look to save, invest or spend, ask yourself “How much is enough?”

Kevin Painter

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