Portfolio Risk Spectrum
While there are many forms of investment risk, in the context of an overall portfolio, "risk" commonly refers to volatility of returns--or the degree to which period returns vary. The pairing of equities (stocks) with fixed income investments (bonds) provides the most basic and effective form of portfolio risk management.
How I view the relationship between available time horizon and acceptable risk profile:
This table shows broad and discrete asset allocation divisions as a means of defining select levels of portfolio risk across a spectrum.
There are many factors that affect the selection of a particular risk-profile for a client, both objective as well as subjective, but one of the most important is the client's time horizon.
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Other important factors to consider in selecting the client-appropriate risk-profile:
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Investment objective
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Age/Life expectancy
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Employment status
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Saving and/or withdrawal mode
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Overall level of savings
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Legacy objectives
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Risk tolerance self-perception
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In the end, I view the selection of a client's investment risk-profile as a shared responsibility between the advisor (me) and the client.
