How much risk is in your portfolio? Seems like a pretty straight forward question. Well…do you know how much risk you’re taking on or are you just taking a ride on the “Trust Express”
You’d think this is something most investors would be demanding to know. Yes, there is a mathematical formula that measures how much risk is in your portfolio. It’s called standard deviation and it measures how volatile your particular portfolio is. It absolutely blows my mind that there is so little talked about this vital measurement in the investment world. Most people have never even heard about it.
Here’s a 2 minute video with Dan Solin (one of his books is on our website recommended reading list) talking about standard deviation.
Solin gives some standard deviation benchmarks in the video. He’s pretty much right on. As point of comparison, here are some examples of standard deviation for a globally broad-based diversified portfolio’s, applying an academic design.
Conservative 6.50%
Moderate 10.50%
Growth 15.25%
Aggressive 19.00%
It’s impossible to have a successful investing experience if you don’t understand risk. It’s not always going to be smooth sailing in the investing world; there will be times when parts of your portfolio will have mundane earnings to out-right losses. Successful investors need to understand how bad the potential downside can be before it happens. This conversation must include standard deviation as well as the sleep factor (what a portfolio could lose during a market down turn); both items are to be thoroughly understood before investing one’s life savings??