Example: A moderate investor can tolerate more risk than a conservative investor, but may be unwilling to accept the short-term risks of achieving long-term returns substantially above the inflation rate. The moderate portfolio would be designed to outpace inflation by approximately 6 percent over 15-20 years. Expected returns from the moderate investor's portfolio are usually double those of a conservative portfolio.
A rough rule of thumb to use in determining risk profile is subtracting the person's age from 100 to arrive at the percentage of investments to invest in stocks. Thus, for a client age 60, a portfolio that is 40 percent stocks and 60 percent bonds and cash may work well. However, more finely tuned risk profiling tools are available.
Because asset classes grow at different rates under different market conditions, it is important periodically to rebalance investment portfolios to maintain the optimal asset allocation. Although asset allocation does not assure a profit, it may be your senior clients' most important decision, accounting for as much as 80 percent of the return from their portfolios.
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