When Risk and Returns Really Start to Matter

Oct 23

I often tell new or prospective clients that asset management is the sexy part of the many facets of wealth management that I work on. For most clients, it is investment returns that get their attention.  But as I go on to explain what it is that I really do and how I help people figure out where they want to go and ultimately how to get there, asset management begins to take a back seat.

Financial writer, Ben Carlson, highlighted a Forbes article on fellow financial writer Michael Kitces in which Kitces touches on the following point, “Ten years before retirement, get serious about asset allocation. “The amount of return you get then actually starts to matter a lot, but the risk you’re taking matters a whole lot more, too.”

Carlson goes on to give an excellent example of Kitces point below;

  • Let’s say you start saving at 30, at which time you sock away $500 a month. Each year you increase that amount by 3% to keep up with inflation. Miraculously — because this is a fake retirement calculator scenario — you earn an even 7% annual return on your money each year. By age 60 you have roughly $830,000. Not bad. But let’s say you don’t want to retire until age 65. By then your portfolio would grow to more than $1.2 million. That means around 35% of your ending value at age 65 would come from the last five years’ worth of portfolio growth. The pressure at that point can be intense if you’re not sure what you’re doing.”

The one caveat that I would make to Kitces’ point is that asset allocation matters all the time but does become incredibly crucial as you get older.  Having a conservative asset allocation when you are younger would likely mean leaving some of the power of compounding returns on the sidelines.  However, when you get to a point where you no longer need to take additional risks, don’t!

Whether you are just starting in your career and even if you are in the middle of it, the best thing that you can do for your investment portfolio is to continue to focus on your career investment and to make sound financial decisions.  This is where wealth management becomes more important than asset management.

The equation to build wealth is no secret, but it does require a hefty dose of discipline rather than IQ.  Below are just a few of the keys factors that you should be considering.

  • Know and understand your wealth and lifestyle goals and more importantly why you have them,
  • Save money in the most tax efficient way possible,
  • Invest in yourself so that you can earn more money,
  • Limit the amount of debt that you carry.

While all of these are critical, probably the most vital and overlooked aspect of investing is investing in one’s self.  By investing in yourself and changing your focus you can change not only your personal life but financial life as well.

Maximize your primary source of income by making yourself valuable to other people in some way. Saving more is excellent, but it isn’t necessarily how most people become wealthy. Wealthy people maximize their primary source of income.  The earlier you can get all these working in balance with each other, your chances for wealth management success will increase.