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mAtchIng rIsk cApAcIty wIth rIsk exposure Stock market returns are compensation for bearing risk. Higher expected returns require higher risk. Therefore, investors should take on as much risk as they have the capacity to hold — their risk capacity. One of the most effective ways to determine risk capacity is to examine five distinct dimensions: an investor’s time horizon and liquidity needs, investment knowledge, attitude toward risk, net income and net worth. This is explained more fully in Steps 10 and 11.

vAlue of A pAssIve AdvIsor Over a decade ago, Vanguard coined the term “advisor’s alpha” as a measure of the value added by passive advisors who adhere to the principles of controlling costs, maintaining discipline and tax awareness. More recently, Vanguard quantified the value of advisor alpha at 3%, basing their number on the sum of estimated values of cost savings from using low-cost funds, disciplined rebalancing, behavioral coaching and asset location/withdrawal strategies.15 Advisors who play an active role in emotions management can be referred to as “passive advisors.” These knowledgeable advisors help maximize investor success by providing the critical discipline required to combat emotional reactions like pulling out of the market the way so many did in the downturn that occurred in 2008 to early 2009. Passive advisors not only help to manage investors’ emotions, they are fiduciary stewards of their clients’ wealth.

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...