The Investment Scientist

Archive for February 2010

Guest author: Mike Piper

“Much rides on how you take your money out, not simply how much you have in.” –Lee Eisenberg in The Number

It’s true. Yet, for whatever reason, there’s much more written about strategies for accumulating assets than about strategies for intelligently spending down your assets.

Investors nearing retirement have a lot of questions, and so far they’ve gone more or less unanswered by mainstream financial media.

Asset Allocation in Retirement

During the accumulation stage, the goal when crafting a portfolio is simply to achieve the maximum return over the period in question without giving yourself a heart attack due to volatility.

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Few people know that there are 2,613,000 financial advisors in the U.S. It is the fifth largest vocation, right after truck drivers and before janitors. Even fewer people know that, unlike attorney and CPA, financial advisor is a free title – there is no uniform legal standard or educational requirement for the title. Nobody will get into trouble calling himself or herself a financial advisor.

In practice, there are two types of professionals who call themselves financial advisors: registered representatives (aka brokers) and registered investment advisors (aka RIAs).

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When talking to a prospect about my advisor services, I would ask him his philosophy about risk. The conversation would usually go like this:

Prospect: “I don’t like losing money.”
Me: “What do you mean? Can you be more specific?”
Prospect: “I don’t mind giving up a little upside; I just don’t want to lose too much on the downside.”
Me: “So you are concerned about volatility risk?”
Prospect: “That’s it.”
Me: “Other than that, are there risks you are concerned about?”
.. (long pause)
Prospect: “Not that I can think of.”

It is not surprising that most investors equate investment risk to volatility; they see assets prices (and their portfolio values) fluctuate every day. But there is much more to investment risk than what meets the eye. And what investors don’t see usually is far more insidious. For example:

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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