Since the constraints pretty much define the ability to take risk, I think it would be helpful if we can come up with a way to define these “default” constraints. Time horizon: What is the “average” time horizon? Liquidity: What is the “average” liquidity need? I remember that it is mentioned in the Schweser video that the default liquidity requirement is something like 4-6% of the portfolio size (ignoring inflation effect). I am not too clear if this only include the living expenses that needs to be generated from the portfolio, or if it also includes other things such as planned donation. If someone can clearly define what is the “average” metrics for these constraints, maybe the process will become more methodical.
Per p116 vol 2, an Above Average Ability is related to “modest goals” relative to the portfolio, long time horizon (consider Stage of Life of individual - foundation = above; distribution = below), and ability to add to the portfolio (has a job or upcoming inheritance that might help pad the portfolio = above).
To make life easier, I use STL to determine the ability to take risk.
Size: relatively large portfolio Time Horizon: longer time horizon. Liquidity: less liquidity needs.
Can those things be quantified at all?
I don’t think…otherwise, 90+% of financial advisors/consultants will lose jobs.
deriv108 Wrote: ------------------------------------------------------- > To make life easier, I use STL to determine the > ability to take risk. > > Size: relatively large portfolio > Time Horizon: longer time horizon. > Liquidity: less liquidity needs. I think there are other considerations too, like having kids or supporting a sick relative.
Determining the ability to take risk for a pension fund is so much easier as they will provide the data for the specific company vs the industry average. If there is such a systematic approach for the individual investor, this area will not be so vague and subjective. I just could not understand why there is no where in the text that mentions what is roughly the average time horizon and the average required return (or liquidity need) for an individual investor portfolio. If there is an “average” starting point like in the case of the pension fund, this process will be much clearer.