How Much Do You Get Paid For Your Risk?

We all know that more risk usually provides more return, but do we all know by how much? There are many different ways to answer this question with multiple factors to consider. A simple way to look at this is to examine the most recent annualized returns and risk (measured as standard deviation) for a consistently managed diversified portfolio index. One such index is the Dow Jones Relative Risk Portfolio index; specifically, the series that includes global asset classes.

The Dow Jones global indices are structured to provide a smooth exposure to risk with a diversified equity, bond and cash allocation. The Conservative index is structured to provide 20% of the risk of a 100% equity portfolio, the Moderately Conservative index is designed to provide 40%, and so on.

DJRiskReturnTable.jpg

As can be seen from the table, one picked up about 2% in annualized return over the past 10 years ended December 31, 2018 from purely picking one risk tolerance compared to its adjacent neighbor.

So, please take your risk tolerance seriously and make sure it fits with your realistic capacity to bear risk. Factors to consider include your overall wealth, income, and lifestyle; as well as your desire to sleep well at night!