As originally appeared in The Jerusalem Post, Thursday, November 15, 2016
“I want to make money with no risk”
This is perhaps the most common definition I receive from prospective clients when I start asking about how they define themselves as investors. When I meet with a prospect I always start probing as to how much risk they are willing to take. After they tell me how they don’t want to lose any money they usually slip in the conversation that they are very conservative investors. I have also learned over the years to not always trust what people tell me. I have been in the finance business for almost 25 years and long ago figured out that the way investors define themselves and the way I define certain terms can be very different. I continue asking questions to try and flush out how they define terms and then I ask for a look at their monthly portfolio statement, and see that all they hold are stocks. In my opinion stocks are by definition aggressive investments, so an all stock portfolio would be aggressive.
Financial advisors need to understand a client’s risk makeup. I spend an inordinate amount of time trying to understand a client’s risk profile, because in order to give proper advice I need to be on the same wavelength as the client. Many advisors use questionnaires which ask a myriad of questions that try and pinpoint the time period of an investment, investment knowledge as well as how one would react in various market scenarios. The problem with these questionnaires is that they only paint a picture based on current trends.
When markets have moved up investors tend to be more aggressive, and the outcome of the questionnaire points that out. Conversely when investors lose money in the market, they tend to be a bit shell-shocked and the answer provided show that as well.
As I have mentioned before, back when I was a struggling new Oleh, cleaning toilets to pay the rent, I needed to purchase an airline ticket to fly back to the US. I was a big fan of trading options- an aggressive investment approach- and had some success, so I said that I would trade options for a short period of time and make enough money to purchase a ticket, and then some. Lo and behold I succeeded, and I was off to the US. Making money was easy. Everything I touched turned to gold. And then I got cocky. I started taking on even more risk, and it didn’t take long before I was once again a struggling Oleh cleaning toilets!
My own overconfidence led me to dismiss various risks, and created a sense of stock trading invincibility.
Look in the mirror
In early 2016 I opened an account for a Russian client, who insisted that he was a long-term investor. He kept telling me that this money is not needed for at least 20 years. He was such a big believer in Russia and decided to put all his money in Exchange Traded Funds (ETFs) that track the Russian stock market. Then the price of oil started to crater and only 3 weeks into his investment, he called with a panicked tone. He said he wants to sell out of his investments because they had dropped 9% on average. I reminded him of his insistence 3 weeks earlier that he was a long-term investor. He said that the drop scared him and he believes that the market is going to crash, and wants only the most conservative investment. Postscript: Russian market has almost doubled since he panicked!
It’s human nature. Many investors have a large appetite for risk when things are going well. When markets aren’t so kind, they are the first to run for the exits. Unfortunately that is the exact opposite of what they should be doing; namely buying low and selling high.
The reason you invest
I know I sound like a broken record because I say this often but it’s so important. Investors should focus on achieving their goals, not trying to make as much money as possible in the market. Money should be used for specific purposes, not to die with the most amount of money possible. The one who dies with the most money does NOT win!
Take out a pen and paper and prioritize your short and long-term goals and needs. Then create a portfolio that will enable you to achieve what is truly important to you.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email firstname.lastname@example.org.