How Much Risk Are You Buying?

Let me ask you a question.

Do you know how much risk you’re buying in your investment portfolio?

Yeah, that’s right, you heard me. I asked you a simple question.

Do you know how much risk you’re buying, the price tag of your risk?

Most people don’t.

In fact, most people don’t even know what we’re talking about.

They don’t understand about investing and how the impact of fees and risk can reduce the value of a portfolio over time.

Another word for risk is volatility.

Let’s assume for a second that you had $100,000 in Portfolio A.

Now, that portfolio earned 10% every year for five years.

Your average return then would be 10%, 10% every year for five years is 10, right?

Your 100,000 would have grown to 161,051, but we all know markets don’t go up in a straight line.

Markets go up, markets go down, so let’s change our assumptions.

Let’s look at Portfolio B.

You average 10%, same 10% as Portfolio A, but the first year, the market went up 20%, and then it went down five.

In year three, it went down 10, and then in year four, it turned around and went up 20, and in year five, it went up 25%.

Both portfolios, A and B, they achieved an annualized return, average return of 10%.

You would expect that they’d be the same, but remember B had volatility, A had no volatility.

Your $100,000 invested in Portfolio B is now only worth $153,900, $7,151 less than Portfolio A.

You see, this time adjusted return is called the internal rate of return, IRR, and it was 9.01% instead of 10 in Portfolio A.

This is a full 1% less and it cost you 4% of your total portfolio gain.

This 1% is a cost attributed to your investment strategy and the risk of this portfolio is costing 1%.

This is how you buy risk.

You buy risk by having too much volatility in your portfolio.

Another cost factor is fees.

If you invested a million dollars over 25 years say at 10%, it would grow to 10.8 million, but just have a 1% fee and it reduced the overall value to 8.6 million.

That’s a 21% reduction and if the fee was 2%, the account would now only be worth 6.8 million, a 36% reduction.

According to Morningstar, which is a major source of data for the industry, the average fee for funds is around 0.61%, or roughly two-thirds of a percent.

The average advisor fee is around 1% and often higher.

Add this to the trading costs and cash drag and it’s not unusual for an investor to be paying annual fees of 2% or more.

Now, let’s subtract off volatility costs. It wouldn’t be unusual to lose two-and-a-half to 3% of your total return.

I’ve just enumerated a number of fees and costs that are involved in your portfolio.

How would anybody know what those are?

At Wealth Teams Alliance, we have created a tool to do that analysis.

We call it our expected return analysis, E.R.A., and that can tell us how much risk you’re buying and how much return you’re sacrificing because of the volatility and the costs built into your specific portfolio.

See, as a steward of your personal wealth, we think it’s important for you to know much those fees are costing you and for you to learn how to manage them more effectively.

If you’d like to have this analysis, this expected return analysis done on your portfolio, we would be glad to provide it for you.

Just click on the link in this video, you can contact us, and we’ll set up a time to be able to do this for you.

It’s a no-cost service and we look forward to serving you.

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