How to think about risk in financial planning

One of the first things that we talk with prospectus clients about is their risk/reward profile.  How much risk is someone willing to take on for a given level of return or reward?

This question can begin quite the debate especially among couples because often their risk/reward profiles can be very different from each other.  One partner could be very risk adverse while the other is more aggressive.  One of our big jobs is to bridge those gaps in a way that helps the client achieve their financial and lifestyle goals.

However, most people likely think about risk in terms of market gains and losses.  As Larry Swedroe at CBS MoneyWatch points out in this article as he was interviewed by Bloomberg's Pimm Fox, there are quite a few more risks lurking out there that people need to be paying attention to.  These risk including the following:

• Longevity risk - you outlive your assets
• Liquidity risk - you need access to cash quickly but cannot access
• Inflation risk - loss of purchasing power
• Life Event risk - death, divorce, new children, etc. you name the event and there is a risk you may not be prepared for it