Investment Advisory Services
Comprehensive Financial Planning & Risk Tolerance
In the realm of personal finance and investment management, the decision between simply choosing a risk tolerance and engaging in the comprehensive financial planning process holds critical significance. While understanding one’s risk tolerance is an essential component of investment strategy, it pales in comparison to the multifaceted benefits offered by a well-structured financial plan.
Understanding Risk Tolerance
Determining one’s risk tolerance involves assessing an individual’s comfort level with the potential volatility and fluctuations in the value of their investment portfolio. It has traditionally been a pivotal aspect of constructing an investment strategy, with individuals categorizing themselves as conservative, moderate, or aggressive investors based on their willingness and ability to withstand market fluctuations and potential financial losses. However, these answers are somewhat based on emotions as they may change depending on if the markets are doing well or if they are doing poorly. When things are up, clients might be willing to take more risk. When markets are down, clients might be more risk averse
Why build your portfolio based on risk tolerance alone when you don’t even know what the minimum rate of investment returns are required to meet your retirement income goals? Once you have that number, you can decide if there is any reason to take additional risk!
The Holistic Approach of Financial Planning
Conversely, the financial planning process encompasses a thorough and holistic approach that extends far beyond a mere assessment of risk tolerance. It delves into a wide array of financial elements with a focus on retirement funding to determine what rate of returns are NEEDED to ensure sufficient liquidity during your lifetime. Once we know what rate of returns are needed and that we have a 100% probability of success, we can fill in the rest of the plan including asset allocation, tax minimization strategies, and estate planning. A well-crafted financial plan serves as a roadmap, guiding individuals on a comprehensive and integrated path toward their financial objectives.
Comprehensive Risk Assessment: Financial planning involves a nuanced evaluation of an individual’s risk capacity, tolerance, and perception, taking into account factors such as income, savings, debts, and long-term financial aspirations. This comprehensive risk assessment provides a deeper understanding of an individual’s risk profile and guides the construction of an investment strategy that aligns with their overall financial plan.
Diversification and asset allocation: A well-designed financial plan incorporates a diversified investment portfolio that not only considers an individual’s risk tolerance but also addresses their specific financial goals, time horizon, and investment preferences. This approach optimizes portfolio performance through a balanced and strategic asset allocation.
Risk Management Beyond Investments: Financial planning extends risk management beyond investment considerations, encompassing areas such as insurance coverage, emergency funds, and estate planning. By addressing these broader risk management aspects, individuals can fortify their financial resilience and safeguard against unforeseen circumstances.
Adaptability and Flexibility: The financial planning process facilitates an adaptable and flexible framework for ongoing risk management, allowing individuals to continually evaluate and adjust their risk tolerance and investment strategy in response to changes in personal circumstances, market conditions, and financial goals.
In summary, while recognizing one’s risk tolerance is an important part of investment planning, embarking on the financial planning process supersedes this initial step. It empowers individuals to construct a comprehensive, well-rounded plan that identifies the minimum rate of return to be 100% confident of success, integrates risk management with a myriad of financial considerations, ultimately leading to a more resilient, effective, and sustainable approach to wealth management and financial success.
Todd Wiersum is a licensed Certified Public Accountant (CPA) and Sole-Owner of Solstice Tax Solutions Inc. He spends 80% of his time as an accountant with Solstice Tax Solutions Inc, an affiliated CPA firm of Encompass Financial Services. Solstice Tax Solutions Inc. may recommend Encompass Financial Services to accounting clients in need of advisory services. Todd Wiersum may recommend Solstice Tax Solutions Inc. to advisory clients in need of tax services, all of which creates a conflict of interest. Tax services provided by Solstice Tax Solutions Inc. are separate and distinct from the advisory services of Encompass Financial Services and are provided for separate and typical compensation. There are no referral fee arrangements between Encompass Financial Services and Solstice Tax Solutions Inc. for these recommendations. Encompass Financial Services clients are never obligated to use Solstice Tax Solutions Inc. for any tax services. You can access our Form ADV here and ADV Part 2B here. Clients can review our advisor’s U4 by using broker check provided by FINRA. Our investment advisory agreement is also available for review.