PUBLISHER: Journal of Wealth Management
DATE: Winter 2014
DOI: https://doi.org/10.3905/jwm.2014.17.3.068
PDF: Not available due to copyright restrictions

Most people have only a set amount of time to achieve a goal. If we assume that markets provide only a limited set of return possibilities, then losses become exponentially more impactful the closer to your goal. In this paper, I develop an equation to help determine how much you can lose before you cannot be reasonably expected to recover given reasonable market returns.


In this article, an alternate paradigm for quantifying downside risk for the retail investor is proposed. It is the goal of this paradigm to provide concrete tools to the retail financial advisor and investor that can be used to understand portfolio risks within a financial planning context. Rather than utilizing general risk metrics, which can be difficult to communicate and make specific, this article proposes risk metrics which are made specific to an investor’s portfolio and understood in the context of the investor’s financial plan. The objectives of this proposed paradigm are fourfold: 1) to provide a required rate of return for a portfolio within the context of a financial planning goal; 2) to create an expectation for a range of portfolio returns over time; 3) to calculate a maximum sustainable loss for a portfolio, defined as the amount of portfolio losses which would cause material change to the investor’s plan; and to develop a strategy for hedging away those excessive losses identified. Also proposed are tools for achieving these objectives: 1) the Modified Required Rate of Return; 2) the Maximum Sustainable Loss; and 3) a Range of Returns by Portfolio Allocation table.

Goals-based investing, wealth management, portfolio losses