Portfolio Characteristics
Understanding Risk
“Beta” is a common measure of risk in the financial community. A beta of one means that if the market goes up by X percent (lets say 10%) your portfolio should go up by X percent (10%). A beta less than one protects on the downside but leaves a little on the table on the upside. A beta more than one will risk extra loss on the downside in an attempt to capture more on the upside.
With retirement assets downside protection is everything. After all if your portfolio drops by 25% you have to make 33% to return to even. If your portfolio drops by 50% you have to make 100% to return to even. In a 10% return environment, if your portfolio drops by 25% it will take you 3.3 years to catch back up. It will take over 10 years to recover from a 50% drop!
Some firms would like you to believe that you can earn 16% like returns from a Balanced Portfolio of stocks and bonds. This is not logical or correct unless they are taking excessive risk.