Risk vs. Reward
Alan thought everything was great. It was August of 2008 and he was just about there! In three months he'd be putting in his retirement papers- he finally had a million dollars in his retirement account. Now, with a "properly balanced" portfolio, he'd be able to take a 4% drawdown against that portfolio for the rest of his life. His stockbroker had assured him of that. This money, along with social security, would put him in fine shape. In three months he'd "stick it to the man!"
Now let's move ahead 2 years. It's the middle of 2010 and Alan can scarcely believe how his retirement is going so far. He had done just as he planned...marched into HR and announced his retirement in November of 2008, even though the stock market was in a free-fall at the time. His broker had assured him not to worry: "it wil come back." Well, it hadn't. Alan was still taking that same $40,000 a year from his portfolio. The only problem was that his portfolio had lost 45% of it's value. His million dollars was now down to almost $500,000. That meant that his rate of drawdown, instead of being 4% was now over 7%. Even that, however, wasn't the worst news. Last month his wife was diagnosed with Alzheimers disease. She would almost certainly have to be institutionalized, and it wasn't cheap. His income right now was a little over $7000 a month. The facility for his wife was $6500.
In desperation Alan was now looking for a job. He desperately needed to go back to work, but as he was beginning to discover, even though he had been a highly qualified software engineer, nobody wanted to talk to him because of his age.
In only two years his wonderful plan for retirement had been dashed on the rocks. What was he going to do? A million dollars had seemed like so much.
The unknown variable for Alan was how much investment risk, he was exposed to. This is the "elephant in the room" that no stockbroker likes to talk about.