Weighing Worst Case vs. Base Case
Investors often face an uneven set of potential outcomes when planning for their financial goals. While future cash-flow needs may not be as rigid as the school bell, most investors still require a minimum level of income to maintain their lifestyle. That minimum plays a major role in how we weigh the trade-off between expected returns and the range of possible outcomes.
Riskier assets that offer higher expected returns can help your portfolio grow more quickly and raise the ceiling on what you may be able to spend in the future. But they also widen the range of outcomes. And if that wider range increases the risk of falling below your minimum needs, it may become an unacceptable trade-off.
In goals-based investing, just like with school commutes, the “tails” of the distribution often matter more than the average.