The article titled Know Your Risk Floor (on Introduction page) discussed an example citing one mutual fund. To determine the risk floor of a portfolio of mutual funds, one must do a little more math. First, determine the percentage of the total for each mutual fund. For example, if there are four mutual funds with $10,000 within each fund (portfolio total = $40,000), the percentage total for each mutual fund is 25%. Then multiply the percent total for each mutual fund by the standard deviation (using a standard deviation from our example, the calculation is: 25% X 10.48% = 2.62%). Perform the same calculation for each mutual fund, and add each total.

Perform the same math for the average (or mean) annual return. To determine the Portfolio Risk Floor, simply multiply the portfolio’s standard deviation by 2, and subtract that number from the portfolio’s average (or mean) annual return. The portfolio should not lose more than this percentage per year 95% of the time.

What about the upside? Simply add the portfolio standard deviation multiplied by 2 to the portfolio average (or mean) annual return. There is a 95% chance this example portfolio’s annual gain will be as high as this figure.

If you have questions about this math, contact your financial planner.