Bull Ride

Capacity Adjusted Risk

Bull Ride

The chart shown below reinforces the concept of capacity adjusted risk. Investors who score a 100 on the Risk Capacity Survey should focus their time horizon on the 15-year holding period, the bell curve which can be seen below when you select Index Portfolio 100 and a 15 year holding period. When comparing the variation of 15-year annualized returns with the wide distribution of one-year annual returns, you can see the difference. Of course the wide range of outcomes can be constrained by the level of risk exposure in the index portfolio.

The second part of the figure below explains the concept of rolling period returns, which was also covered in Step 8. You can also select different Index Portfolios (indicated by the portfolio number and different colors) on the top to display each simulated passive investor experiences and rolling period return.

If we look at how the range of annualized returns are reduced over time for all 20 risk capacity levels and plot all this data on one big chart, you get the figure below. The portfolio pages on ifa.com provide an abundant amount of data about the 20 risk exposures that match the 20 risk capacities shown in this step. The figure below summarizes just about the entire concept and the enormous amounts of data contained in the portfolio pages.

Capacity adjusted risk is an entirely new way for investors to look at the uncertainty of their investments. One of its primary benefits is that it starts to get investors focused on a longer term prospective and not the daily, monthly, annual, or even three-year returns that detract investors from staying the course on their investment plan.

For investors who honestly answer the questions in the Risk Capacity Survey, the risk of their investments can now be seen in a new perspective, adjusted for their capacity. Essentially, risk is held fairly constant for all investors as long as they adhere to the average time horizon of their risk capacity score. As explained above, that score measures dimensions beyond just time horizon, so that time is not the only consideration.