Content provided by J.J. Schenkelberg, CLS Senior Portfolio Manager
Have you ever set a goal? Something you strived for that required time, patience and hard work to achieve. Maybe it was completing an educational degree, passing a test, running a race, losing weight, or something as simple as waking up a little earlier. Easier said than done, right?
We all set goals. But, what happens when we actually achieve one of them? It feels really good. But, then there is the question: now what? For the past several years many investors have been preoccupied with their investment accounts recouping losses from the 2008-2009 decline. Since equity markets have staged a rebound past 2008 highs, many investors have achieved the goal they had set the past few years. Now, they may seem a little lost as to what to focus on.
When opening an account with CLS, most clients fill out a risk profile questionnaire to determine a risk budget. This questionnaire helps set the proper risk level to manage the account for future financial goals based on willingness and ability to take on risk. This profile should be reviewed annually for any life changes that may have occurred.
The question, “Should I change my risk budget?” has been coming up more often these days. It always surprises me a little when I receive this question from investors in response to market conditions. It is important to remember that your risk budget is set as a guide to manage volatility in your portfolio according to your long term ability and willingness to tolerate market risk; to as a tool to tactically play the market. Seeking short term advantages in the market by shifting risk budgets can quickly become an emotional event for clients. Making investment decisions based on emotions does not typically lead to the best outcome.
So, should your risk budget ever change? Maybe. We recommend reviewing the CLS Investment profile with your advisor each year. Through this review any life changes that may impact your financial condition should be identified, such as a job/salary change, illness or birth, to name a few. It is these changes in financial condition that should dictate changes in risk budget.
A client’s risk budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio.