The Family Index- Josh Bailey, Carroll financial
May 27, 2021

The Family Index

Spring 2021 Quarterly Newsletter

Author: Josh Bailey, CFP®

Many folks know about the trade-off between risk and reward as it relates to investing. The more investment risk you take, the more opportunity you have for higher returns. Some folks even know the differences between the three components of investment risk, which are:

1. Risk Tolerance – The emotional characteristic of dealing with risk. A gauge of an investor’s aversion to risk and his or her propensity to stay the course during market downturns.

2. Risk Capacity – The actual ability, emotion aside, of a portfolio to sustain turbulent markets and still accomplish one’s goals. For example, a young investor with job security generally has a far greater risk capacity than a retired investor who relies mainly on his or her portfolio for income.

3. Required Risk – The amount of investment risk an investor must take to generate the returns necessary to meet his or her financial goals.

However, very few people know how to calculate all three risk components for their portfolios. Sure, there are plenty of decent risk tolerance questionnaires online and a household cash flow statement can help estimate risk capacity, but the most difficult one to pinpoint, and arguably the most important, is required risk. An innovative calculation called The Family Index aims to solve this dilemma.

The Family Index is the rate of return needed on your portfolio to achieve your goals while maintaining resources during your anticipated lifetime. In other words, how much does my money need to grow to ensure I do not outlive my nest egg?

Obviously, every family has unique financial goals and obstacles. So how does one calculate their Family Index? It starts with a financial plan.

A comprehensive financial plan is the critical first step in determining your Family Index and, in turn, your portfolio’s required risk. Proper planning should provide clarity on what your situation is today, what you want to accomplish in the future and the recommended steps to reach those objectives. Once you calculate your Family Index, you can design an investment allocation that should realistically meet or exceed that target return over the long run.

By knowing your Family Index, the focus shifts from issues you cannot control, such as the burgeoning Federal debt or your neighbor’s stock returns, and centers on what matters most, which is your family’s goals and priorities. Equally as important as calculating your Family Index is periodically monitoring your financial plan and updating it throughout major life events.

Ideally, all three components of your risk profile should align so you are not required to take more risk than your tolerance or capacity allow. If not, trade- offs must be considered.

Please contact your advisor if you are unsure about your risk profile or want to learn more about your Family Index.

This article was featured in our Spring 2021 Quarterly Newsletter available here:

Quarterly Newsletter
Share This
Skip to content