Risk is one of those words that many people understand until you start talking about it in a portfolio context. They know what risk means, but the gap is between knowing the word and understanding what it actually looks like when it shows up in their account.
The Common Starting Point
When we sit down with prospects and clients, the risk conversation tends to start in the same place. They want the least amount of downside and as much upside as they can get. That's a very one-dimensional view of risk and reward, and it's more common than people might expect.
We had this conversation just last week with a client. He didn't want to take on much risk, but he wanted his portfolio to grow in the high single-digit to low double-digit range. Those two things don't easily reconcile, and working through that tension is exactly what the risk conversation is really about.
Two Questions Worth Separating
When we work through risk with a client, we try to look at it from two directions at once. The first is personal and psychological. What is the client's actual comfort level? How would they feel if their portfolio declined ten percent in a given year? Twenty percent? That's not a hypothetical designed to scare anyone. It's a real question, because markets have done both, and portfolios structured to pursue meaningful growth will experience drawdowns along the way.
The second is goal-oriented. What level of risk does the client actually need to take in order to meet their objectives? This is where we start with the goals themselves, work backward to the rate of return required to achieve them, and then look at what kind of risk that rate of return has historically implied.
How the Analysis Actually Works
From a Life Vision planning perspective, the process looks something like this. The analysis shows that a client needs a certain rate of return to meet their goals. Based on that, we examine how portfolios have historically behaved at that return level and arrive at a realistic picture of what volatility could look like in any given year. That means their portfolio could decline by a specific amount, depending on market conditions and historical patterns.
We then go back to the client with that number and ask directly: " How would you feel if this happened? Their answer shapes what comes next.
When Comfort and Goals Don't Line Up
If a client says they're not comfortable with the level of risk their goals require, that becomes its own conversation. We walk through what taking less risk actually means on the other side of the equation, specifically what they may have to give up in terms of return potential. Both sides of that tradeoff deserve to be on the table.
What we're really trying to understand is two things simultaneously: their psychological capacity to withstand market volatility, and the practical risk level their goals actually require. Structuring a portfolio well means accounting for both, not just one or the other.
Showing the Evidence
A lot of this conversation is grounded in empirical evidence. We show clients actual reports that illustrate what a given level of risk really means and how a portfolio would be structured as a result. The goal is for them to walk away with a clear, honest answer to a straightforward question: do you feel comfortable with this?
That clarity is worth working toward. A client who understands their risk, both psychologically and relative to their goals, is in a much better position to stay the course when markets move than one who never had the conversation.
If you've never worked through your own risk picture in this kind of detail, or if your goals have shifted since you last did, it may be worth revisiting. You can reach us at www.vanleeuwenco.com to schedule your complimentary consultation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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