The Levines are retired and in their mid-60s. In June 2007, they closed on the sale of a small chain of stationery shops they had owned and operated since 1968, leaving them with a net worth of $7 million. The proceeds from the sale, along with some modest savings, were intended to be their primary source of income to support them through their retirement.

By October of 2007, their former financial advisor had them fully invested in a combination of equity mutual funds, separately managed advisory accounts that were also invested in equities, fixed income mutual funds, and certificates of deposit that had been bought in the secondary market.

Indeed, their assets were broadly diversified. However, by December of 2008, their $7 million portfolio had dropped like a rock to $4.5 million.

In March of 2009, they called me. With vacant eyes, Mr. Levine recounted several times during our first meeting the conversation he had with his former advisor during their final annual review:

Mr. Levine: I thought I was diversified.

Former advisor: You are.

Mr. Levine: Well, then, what happened to the $2.5 million?

Former advisor: It's gone.

Mr. Levine: What do you mean 'gone'? Gone where?

Former advisor: Gone. Just... gone.

Now, for the Levines, embedded in the word risk is every fear they harbor about losing what remains of their savings and everything they associate with it-like safety, security, status, subsistence.

The depth of their reaction to what happened to their investments underscores the practical and emotional importance of the subject of portfolio risk.

Curiously, though, the measures taken by most private investors and their advisors are woefully insufficient. Portfolio risk is frequently treated as a slow-moving variable, and that can have devastating results.

Typically, portfolio rebalancing is driven by things like sector rotations or under- and over-weightings that must be rectified according to an investment committee. By default, the task of risk-based rebalancing is left to the relationship manager, whose primary responsibility is-as the title clearly states-relationship management, not risk management.

As a result, there is rarely any risk-based rebalancing at all.

For investors like the Levines, that is like embarking on a trans-Atlantic voyage with the expectation that the sail configuration rigged up in Boston Harbor will be sufficient to deliver their vessel to the white cliffs of Dover without any adjustments.

Admittedly, discussions about risk can be challenging, in part due to the temptation to use terms that might be familiar to you, but are more like Uzbek to your clients.

During my discussion with the Levines, I'm careful to avoid snarling things up with abstruse jargon that might sound sophisticated, but really, in fact, brings no comfort, confidence, or genuine understanding to clients.

Consider what occurred when the Levines met with their former financial advisor. Following a flashy presentation, they walked out with a dossier filled with colorful pie charts and a new vocabulary with words like beta and alpha to add to their lexicon, as well as the instructions for a $2.5 million shellacking.

So, although there are certainly many different approaches, I choose to set things in motion by framing the risk discussion in terms of returns as compensation for risk. I use quantities in a way that inspires the Levines to think about "purchasing" expected returns with capital they've placed into a "risk budget."

They decide how much they wish to commit to their risk budget, knowing that "buying" those big expected returns is going to consume an awful lot of it, while less ambitious return aspirations are a little less expensive.

One simple construct involves splitting their capital into two theoretical accounts. One theoretical account is "guarded" with the objective of never allowing it to drop below a predetermined amount.

The second theoretical account, which is associated with the first one, could quite literally approach and even go to zero.

The latter is their risk budget and represents the amount the Levines are prepared to spend on their purchase of expected returns.

A dialogue along these lines provides us with a common language that prevents them from being haunted by scary thoughts about foreclosures and second-hand shoes.

It forces them to make measurable connections between the returns they might expect and the potential cost of achieving them. To relieve some pressure, I reframe my question about risk in quantitative terms, attaching real numbers to it.

The Levines actually seem surprised and even pleased that the discussion needn't require them to imagine expulsion from the country club, or repossessions, or far worse.