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Assessing risk in personal finance - Part II
By now, if you tried to do some wealth simulation using Excel, you will have understood that it can get quite tricky, especially when you want to change some age parameters etc. The Wealth Manager has been designed to solve this problem easily and graphically. However, looking at a steady return of let’s say 8% per annum is quite rosy to what we know from the stock market. Bull runs yield much better returns than 8% and bear markets actually destroy much value. The latest credit crisis is a good example of value destruction that happened at an astonishing pace. This is all about risk. Risk is defined as a measure for the difference between the expected return and the actual return. During bear markets, the return on your portfolio will be much lower than in normal years, or during bull runs for that matter. And obviously, a market crash will yield losses compared to positive returns. The question is therefore how to do scenario analysis on potential stock market crashes? We know downturns happen every
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