Is Risk Tolerance the Wrong Foundation for Portfolio Construction?

“I haven’t seen anyone talk about this. The very idea of Risk Tolerance is not just overused, it is incorrect from the get-go. We financial planners/investment advisors preach rational, rather than emotional investing. Yet, the fundamentals of our portfolio structure include an expectation of emotional misbehavior. Why do we encourage that which we discourage? Time horizon and required return are the components of a consistent, customized plan, as you are saying.”

That was a comment from an advisor during a recent webinar, and it stopped us in our tracks.

For years, the industry has built portfolios around risk tolerance, a concept that assumes clients will react emotionally in down markets. But what if we’ve been focusing on the wrong question?

More and more, RIAs we speak with are asking:

🔹 What’s the required return a client needs to reach their goals?

Instead of framing investing around how much risk a client thinks they can stomach, why not build portfolios based on what they actually need to succeed?

P.S. Enjoy this amazing Boston sunset!

#GoalsBasedInvesting #WealthOptimization #RequiredReturn