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Kendall: Stress testing your portfolio

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Ken Kendall, CFP, CLU, Kendall Financial LLC. Member, Wealth and Wisdom Institute

Every day we visit with people who have some of their money invested in the stock market.  Most often this money is invested in a 401-k plan offered by the investor’s employer and it is frequently the largest investment they have besides their home.

When we look at the portfolios and follow up with the question, “How did you pick these particular investments?” there is normally a long pause and a sheepish look. The cause of this awkwardness is that most of these investments are chosen only by the name of the investment; Small Company Growth, Balanced International, Large Company Value and so on.  While the names do give you a starting point, there is so much more research that should be done.

So why, in nearly every case, do investors do almost no research as they put their money into their 401-k plan? It is a simple answer; everyone is busy living their lives.  If they wanted to spend their free time digging into the standard deviations, alpha, fund objective vs the current economic environment, tenure of the portfolio manager, consistency of the fund company and a hundred other arcane things, they would be working in the financial field.

One of the tools we have available is a software program that in about five minutes gives a remarkably accurate picture of an investors risk tolerance.  Fortunately the program also has a database with the risk scores of most of the securities that are offered in 401-k plans.  So we are able to see the estimated risk in an investor’s current portfolio and compare it to his or her actual risk tolerance.  We can then suggest ways to adjust the current portfolio to better reflect what our investor’s comfort level.  We can also run Monte Carlo simulations to predict the performance of the new portfolio and how well it should meet your retirement needs.

We’ve found that the more involved our customers are with this process and the better informed they are about where and why their money is invested, the less stress and greater confidence those customers have.

We want to invite you to call us at 972-874-8757 for a free initial appointment where we can talk about your current investments and how we might be able to tailor fit them to your risk/reward profile.

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