Your Biggest Risk is Your Broker's ignorance (About Risk)

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Here's a question you must ask your broker: What's the risk of my portfolio?

Most likely, he won't be able to answer it. Why? Because he doesn't know, and he doesn't know how to calculate it.

The historical risk of a stock or an entire portfolio is measured by calculating its standard deviation. Before you throw up your hands in despair, just think of standard deviation as a way to measure historical volatility.
I can't think of anything more important than understanding the historical volatility of your portfolio. Yet few investors do understand it.

I am going to make this very easy for you:
  • Conservative investors should have a standard deviation no higher than 8 percent.
  • Moderately aggressive investors should have a standard deviation no higher than 15 percent.
  • Very aggressive investors should have a standard deviation no higher than 20 percent.
  • No one should have a standard deviation higher than 30 percent. Period.
If your broker answers your question with anything other than the standard deviation of your portfolio, run for the door.

Dan Solin is the author of the newly published book The Smartest Retirement Book You'll Ever Read (Perigee Books 2009). His prior books include The New York Times bestsellersThe Smartest Investment Book You'll Ever Read andThe Smartest 401(k) Book You'll Ever Read. See SmartestInvestmentBook.com.
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