“Risk and return are related.” That was the soundbite of the 20th century, the mantra of Modern Portfolio Theory. Whether through those ubiquitous risk tolerance questionnaires or nearly any portfolio optimization software package, in one way or another, most professionals have been trained to use the mathematical equivalent of risk to plot investment strategies.
There's only one problem: It's all wrong.
Our use of risk fails in two ways. First, the industry has vastly misinterpreted the definition of the risk/return relationship. It has implied an absolute correlation between real risk and real returns exists. In truth, it's always been the perceived risk that's related to the expected return. Indeed, academic studies upon which many have based the use of risk tolerance questionnaires specifically warn against their use. Maybe the marketing guys forgot to read the fine print.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
