In Q3, we typically revisit our client’s risk tolerance.  This year, that review seemed particularly applicable given the volatility we saw in the months of July and August.  I was curious what sort of responses we’d receive.  For the most part, my observations have been that volatility is becoming a bit of our expectation and there isn’t much discussion needed.  Despite the media frenzy, I believe people are better at maintaining a healthy and long-term outlook than TV might portray.

That said, we’re all human and I thought this exchange was worth highlighting.  A client responded to an email from me that requested her completion of a risk tolerance questionnaire.  We use a company called RiskAlyze (see: What’s Your Risk Number?).  The client responded with gratitude. In fact, she implied we must be ‘in sync’ as she has been concerned with the flat trajectory over the last 20 months, particularly as she neared retirement – implying that perhaps a more aggressive approach was appropriate.  Worth noting: this is not a first time request from this person and I’ve always responded with an alternative solution of saving more aggressively vs investing more aggressively and chasing returns.

There are two emotions at play here.  As financial advisors, we frequently manage fear and/or greed.  This was an interesting case where both emotions reveal themselves.  This person is in fear that they will be short of money at/in retirement.  As a result, their response is greed – i.e. perhaps we should be more aggressive with our investments.

This is incredibly common and not meant to ridicule whatsoever.  The best investors face these emotions.  However, the best investors know when these emotions are present and how to best manage them.  Pointing out the emotions might be less than half the battle – after all, we all face them.

How we respond is the better topic to address.  My experience has been that simply eliminating something doesn’t work – meaning, it’s not enough to try and stop feeling a certain way.  Rather, we must replace the emotion.  In times of feeling fearful, where can we find courage?  In times of feeling greedy, where can we find patience?  Also, my experience is that greed feeds fear and enhances its intensity.

Fear of market volatility or not having enough money in retirement are legitimate fears.  This emotion leads to greedy and impulsive decision making.  When we feel impulsive with our investments, it’s important we recognize that this is born from fear.

What are countering actions that are courageous and combat fear?

  • Confirming your asset allocation is appropriate for your time horizon
  • Saving more.  Dollar cost averaging removes emotions and encourages buying even when markets are down
  • Having a process and not deviating.  For instance, here’s our process (see The FIA Way).
  • Increase your income – for example, part time work

All these actions are in direct opposition to fear and promote your long-term wealth creation and preservation.

What feeds fear?

  • Chasing returns
  • Trying to time the market
  • Trying to control everything

Try to be mindful of your urge to increase your investment risk level purely for the sake of making more money.  Create a system around investing your money and stick to it.  Timing the market is not a system; it’s good TV.  And, at some point, you must accept all your best efforts and trust them.  Trying to control beyond that only feeds fear and greed.

Stay calm. Stay invested.

Thanks for reading,

Riskalyze is an independent third party service provider and is not affiliated with Raymond James. This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Any opinions are those of the author and are not necessarily those of Raymond James. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders adv ice on tax, legal or mortgage issues, these matters should be discussed with the appropriate professional. Investing involves risk, Investors may incur a prof it or loss regardless of the strategy or strategies employ ed. Retaining the services of a financial professional does not ensure a favorable outcome. Links are being provided f or informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

Mitch

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