RIsk tolerance, Return expectations?
Do you have any exercises or questions to calculate a client's risk tolerance? Has that changed in the past year?
I find that it someone is risk averse it comes out pretty early in the conversation. I haven't found that any of the quizzes we are supposed to give clients are all that helpful.
Also, what kind of expectations do you set for return?
For stocks, I've been using some form of 3 pct GDP growth, plus 3 pct inflation, plus 2.5 pct dividend rate = 8.5 pct anticipated long term return.
For bond return, I don't know -- maybe the historical rate on Treasuries?
I try to figure out what the client need in terms of return instead of trying to come up with an average return. Because those tend to fail, but if I know I need 7%, then i have no problem skipping the stock purchase(more risk) and buying a muni bond yielding 5.5%.
I used to use a similar formula you describe, but during that last 10 yrs or so... that hasn't panned out. And although over the long term the indexes may average 8,9,10 or 11%(whatever the number is now).. my client doesn't have 75 year or even 50 years...so a 10 year crap period is 30% of their time frame..