I was a kid in the 70’s, so I know about inflation, so I know that investments that are called safe are not necessarily safe, though they do tend to have lower volatility than investments that are called risky. And I know that over the long term, stocks bring in more than bonds, so that helps with long-term risk. And I know that over the short term, any asset class can be earning the highest returns or the lowest returns, and this keeps changing. So diversification helps reduce short-term risk.

I played some stock buying games and learned that although sometimes I have a good feel for where a stock is going in the short term, this is not reliable enough for me to invest much money in it. When I started buying real stocks, I started with an amount I could afford to completely lose. Now I realize that with a diversified portfolio, the most I’m likely to lose is one half or maybe two thirds of the value. And generally sometime after that point, there is rapid growth to make up for some or all the loss.

So basically, although I am completely risk averse, my grip on reality has taught me to deal with that through diversification (and fee minimization) rather than by freaking out and selling during stock plummets. So far, I’ve always been able to convince myself that plummets are the time to buy (though I was wrong about Japan’s plummet all those years ago) rather than to sell. Oh, I also don’t leverage, buy junk bonds, or (except when I’m willing to risk losing it all), buy risky stocks of new companies.

And so my point is that although emotional comfort with risk is tied to personality, it can be modified through education.

To Julie’s comment, I think it comes down to priorities, which will define need. If Steve would rather take more risk so he can leave a larger estate behind, or take more/bigger vacations, then he would have a valid need for the additional risk. But if Steve didn’t have such priorities. It would not make sense for him to take more risk because he is able to.

Perhaps a better way to make an example of Steve would be to say that after taking his pension into account, his other retirement assets don’t really need to grow much more to cover his desired living expenses.

You say:
Example 1: Steve recently retired after working for the Federal government for 35 years. His pension completely covers his living expenses. Steve has no need to take risk in his portfolio.

Since his pension covers his living expenses, what is the reason for his portfolio? Without risk, the portfolio probably won’t grow much. He doesn’t need it for daily stuff, but he could leave lots more to heirs, or take bigger trips, or a variety of things, if his portfolio was larger. I would think that since he doesn’t “need” his portfolio, he can take lots of risk, and maybe have it grow into something special…

There are a lot of different options strategies out there. Not all are high-risk with high expected return. In fact, some are used to reduce the risk (and expected return) of a portfolio.

My opinion on options though is that there are very few individual-investor-situations* in which options strategies make sense rather than simply picking a portfolio with an appropriate asset allocation. (That is, you can increase or decrease the risk/expected return of a portfolio without having to resort to options. If you felt a situation called for a very high risk level, you could simply increase the allocation to equities or increase the allocation to particularly high-risk equities like small-cap/value stocks.)

So to answer your question, no, I probably wouldn’t advise using options in such a scenario. (Nor, for that matter, would I likely suggest a high-risk portfolio in such a scenario.)

*To provide example of when options might be useful for achieving a goal that cannot be achieved using simple asset allocation: Consider an investor who has a significant amount of his assets in his employer’s stock (because of a retirement plan that allows for purchases below market price, for example). In such a scenario, it might make sense to buy put options on that stock in order to protect against loss.

What if you have someone who is retiring in say 5 years, and is about 8 years away from their goals. They are adamant about retiring in 5 years, but discretionary income isn’t their this time. Do you advise the option route?