The process of building a great portfolio that accomplishes its goals is the same as constructing a home: It must begin with a solid foundation.
When advisor Steven Copeland, proprietor of Bronxville, N.Y.-based Safe Harbor Financial Planning, builds out a portfolio, risk management is the plan’s foundation. “We don’t do anything until the foundation is built,” he says.
When clients come to Copeland with money to invest and to ask for his recommendations, he performs a thorough analysis to determine if the investors’ risks are covered. This includes an analysis of future cash flows combined with in-depth client conversations regarding the client’s priorities and goals for a variety of scenarios including death, disability, long-term care, property losses and civil suits.
Only once that’s in place does he determine where to invest. “The plan has to survive any conceivable scenario,” Copeland explains. “It’s fine to build a nice portfolio but if the whole thing would fall apart anyway in the event of illness, for instance, I haven’t done very much.”
When the fee-only planner builds his portfolios, he runs Monte Carlo analyses to make sure that even in a worst-case scenario the portfolio would support the client’s future needs. Then he looks at volatility and the ability of the client to stick with their plan through all the ups and downs of the market.
“As people grow older, they start to get very conservative, which means that they wouldn’t be able to sleep at night if their money loses a large percentage of its value,” Copeland notes. “But from the overall planning perspective, risk management is determining if the plan can survive any potential catastrophes, from the house burning down to permanent disability. . . the sort of scenarios that can torpedo any plan.”