Older clients use the term to reflect their risk appetite.  A client with a high appetite for risk might have 90% of his portfolio in stocks, for example.  (Normally, as a person ages, the percentage of their portfolio allocated to stocks decreases.)  Clients see risk in terms of two asset classes:  stocks and bonds.  They see stocks as risky and bonds as safe, which still remains the conventional wisdom, unfortunately.

Financial advisors are schooled in Modern Portfolio Theory, which believes an allocation of funds into different asset classes will improve returns and reduce risk over the long term.  They see many different asset classes, including:  large cap value stocks, large cap growth stocks, mid-cap growth & value stocks, small cap growth & value stocks, international stocks, emerging market stocks, cash, currencies, precious metals, long term corporate or government bonds, short term corporate or government bonds, managed futures, real estate, commodities, and so forth.  To a financial advisor, asset allocation asks the question of how much to allocate to each of these asset classes and is not a measure of risk.

It is therefore the duty of the financial advisor to listen carefully to his client.  If the client says he wants a 60% allocation to stocks, he is saying that he wants to take some risk, so he can hopefully enjoy some good performance, but don’t go overboard.  It is also the duty of the financial advisor to explain that many individual stocks are far safer than bonds, even while producing better income than bonds.  It is especially important that the financial advisor explain that long term bond funds are especially dangerous.

Our speaker didn’t discuss how younger clients might be using the term differently, but I can still remember the days when I thought I was bulletproof and couldn’t even define risk, much less worry about it.  Oh, how things change . . .