Investment risk maximization exercise
Good morning!
I continue to receive wonderful emails from y'all with ideas and suggestions galore!
Thank you.
In fact, one reader (and next-door neighbor) gave me a book to read. She told me it might spark some ideas, and she recognized some parallels with the book and financial life planning.
Thanks D.M. for the fantastic book!.
And if you're curious, I encourage you to check it out here. It's a quick read, a beautiful book, and will really get you thinking about things.
From the book's introduction,
"This book is for everyone, whether you are eighty or eight - I feel like I'm both sometimes. I'd like it to be one you can dip into anywhere, anytime. Start in the middle, if you like. Scribble on it, crease the corners, and leave it well thumbed."
I returned my neighbor's copy to her, but will be getting my own copy which I plan to revisit regularly.
How Much Investment Risk Would You Like?
I've written before about my dislike of investment risk tolerance questionnaires.
In fact, over the last several days I shared a couple of my thoughts on Linkedin about this very topic:
If you're on Linkedin, you can check out the links above. And while you're there, visit my profile and send me a connection request.
If you're not on Linkedin, here's the bottom line...
These widely used risk tolerance questionnaires are designed primarily to do 2 things:
In many cases, they're a legal "CYA" tool designed to document a client's investment preferences in case there's ever a question regarding how a portfolio performed, and
By their very design, they ask you to identify the maximum risk you think you can stomach just so your advisor can position you and your investments to experience your MAXIMUM level of risk.
Guess that's why they're called "risk tolerance" questionnaires.
Let that sink in...
They typically ask you things like how much could the market drop before you'd run for the exit sign.
Or, how many years will it be before you plan to use this money.
And if the market drops (it's interesting that they never say "when"), would you panic and sell or invest more at lower prices.
These things are typically 10-15 questions long, but hopefully you're getting the idea.
Heck, you may even have had one of these thrust upon you by an advisor in the past.
Thankfully, there is a MUCH better alternative...
Rather than trying to identify your maximum risk tolerance and then setting up your portfolio to experience it, often in isolation and without the benefit or context of a personal financial plan, what if we instead identify the MINIMUM amount of risk you need to make your plan work?
Clearly, this only works as part of a holistic personal financial planning strategy.
But I believe it's important to recognize investment risk is just one of several choices you have.
Others include:
The timing of goals (when you retire, for example)
The amount of goals (how much you spend in retirement)
The frequency of goals (planning a dream vacation every year vs every 2nd or 3rd year)
How much, if any, you want to earmark to go to your heirs
And of course, investment risk
I could write pages about the problems (and dangers) associated with the typical, lazy approach to identifying an appropriate level of investment risk for your specific situation via a multiple-choice questionnaire.
But I'll get down off my soap box now and leave you with this thought...
If you believe, like I do, that investment risk is a choice, and that it can change over time based on your personal circumstances as well as what's going on around you, how often do you think the typical questionnaire-wielding advisor ever revisits your "risk tolerance?"
In my experience... rarely.
If ever.
Links & Things
Listen in on my latest podcast conversation with Kyla Lines, an Atlanta family law (divorce) attorney.
And be sure to share, subscribe, and leave a review if you feel so inclined.
Thank you, as always, for reading.
Until next Wednesday,
Russ
P.S. > Be on the lookout for a reader survey coming next week. Really want your feedback about my writing, my podcast, and other ways I can help with education (and maybe a little entertainment along the way).