Broker Check

2020 Investment Risk Management

| January 12, 2020


Some Investment Risk Tolerance Considerations (“Risk Grid”)




20 “best” stocks

100% stock concentrated not fully diversified. Objective "Pick Biggest Winners." NOT guaranteed.

Potentially biggest gain

1       Potentially biggest loss

2       Picking winners & losers

3       Collectively historically inferior track record to index.

4.      Higher expenses to pay professional manager

100% stock index fund

(e.g. S&P 500) (C S I Funds Fed Only)

1.      Largest potential fully diversified gain.

2.      Very low internal expenses

3.      Not paying for “picking winners & losers”

4.      Understandable - You “know what you own”

Potential unlimited capital loss

Risk-managed 100% stocks

(selected using lower risk criteria)

Goal: Potential for smaller capital loss.

Potential for smaller gain

VA stock sub-account(s)

1.      Upside potential like stocks reduced by expenses

2.      Lifetime income (often joint) often available guaranteed by carrier

3.      Investment choices S & P  + many others.

4.      100% liquid at market value every business day (Advisory flavor or post-surrender period.)

5.      Some carriers sometimes offer Guaranteed “Benefit Base” annual growth even in years when sub-account has annual loss.

1)     Potential gain reduced by expenses typically higher than other stock choices

2)     Complexity

3)     Typical guarantee against income loss + sometimes death benefit but not often guaranteed against capital loss.

4)     Contract value reduced by amount of expenses

Bond Funds

1.      Lower loss potential than stocks

2.      Higher potential upside than Bond Ladder

3.      Historically has sometimes produced higher returns:
(a) Than bond index funds
(b) Than Bond Ladders

4.      Lower dollar minimums than Bond Ladder

5.      More diversified than bond ladder. Many more bonds and categories of bonds.

1.      More risk of principal loss than bond ladder

2.      Bond Funds do not necessarily return principal as bonds in ladder held to maturity typically do when return of principal guaranteed by issuer

Bond Ladder

(individual bonds)

1.      You know what you own

2.      Predictable interest payments typically 2X annually each bond

3.      Held to maturity typically returns principal

4.      Lower risk of principal loss. Only default. Historically small

5.      Liquid every business day at market price.

Relatively low return

Daily market price fluctuation before maturity.

Money Market etc.

1.      Liquid every business day without penalty

2.      Historically low volatility

3.      One of most conservative choices

Relatively low return

"Protected" Cash

eg FDIC CDs, G Fund (Fed only)

Protected or guaranteed against market loss

Historically low return