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"TAMRIS" - Setting standards

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Why are these dangerous risks?

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investors will be depleting capital, to some extent over time to meet their financial needs, even high net worth investor. This means they will be having to sell assets to meet financial needs over time.

If you are selling and consuming assets, you want to be able to sell and consume highly valued as opposed to under valued assets.

If the portfolio is not properly constructed you will risk having to sell equities when markets are falling or at low levels.

Selling low risk assets can be just as risky if the structure and the planning of the low risk portfolio does not match the size and timing of financial needs.  So it is not just stock market investments that can expose you to liability risks.

If your portfolio is properly constructed and designed to deal with these risks you will find that your financial security will not be affected by these risks, even though your equity investments will have fallen in value.

This because your portfolio should have sufficient low risk assets to ride out such a storm, because highly valued assets should have been sold in advance and, the portfolio should be able to wait for under valued assets to recover in value.  Text Box:  

Portfolios which are well diversified can use the different economic and market cycles in global markets to manage liability risks. Internationally diversified portfolios are better able to manage these risks.  Even within in each market, portfolios diversified across sectors and company size are able to enhance the management of risk and return. 

Additionally if the returns on which your financial security was based do not reflect these risks and, the portfolio is not structured properly, risks to financial security can be compounded.

Extreme scenario

The above chart shows the dangers of using inappropriate return assumptions for forecasting wealth or the ability of assets to meet financial needs and an inappropriate portfolio structure.

It uses the S&P starting level for each year from 2000 to 2003 and withdrawals of $8,000 a year, taken at the start of the year, the red line.

It compares this against a forecast return of 10% a year at the start of the period (blue line) and $8,000 a year of withdrawals.

While the above is an extreme scenario, it is not an uncommon scenario.  Many investors receive such portfolios and such advice.  It is important to note that the S&P 500 as of August 2005 has still not recovered its previous high let alone met the return forecasts upon which investor's had based their security.