If you’ve turned on the news anytime in the last few months, I bet you are feeling nervous about investment markets. It is hard at times to stay calm and breathe in light of constant – and often highly exaggerated – media bombardment. I hope this story of a client of mine from just after the 2001 stock market crash helps calm your nerves, and remind us all that investment strategies are for the long term! If you want to review your holdings in light of the market jitters, drop me a line at firstname.lastname@example.org or 226 884 5545 x100
Early in my career as a financial planner I took over the accounts of a wonderful gentleman named Daryl. Daryl was a baker. As you might expect, given his profession, Daryl could make dough rise like nobody’s business. Turns out that talent for rising dough was handy in multiple ways, because despite never making more than $50,000 a year (in today’s dollars), he had managed to tuck away nearly a million dollars by his late 50s.
When I met Daryl, he had, in his own words “just gotten over changing his underwear daily” having ridden through the stock market collapse of 2001. A fairly aggressive investor, he had been hammered by the significant drops in equity markets.
Burned by his experience, he came to me looking for a more modest portfolio that wouldn’t be as volatile as what he’d experienced. He was determined to retire by 60, but the drop in his portfolio left that looking unlikely. A gambler by nature, having been so badly burned, he had turned quite conservative.
I took him through a risk tolerance exercise, and sure enough, he needed to adjust his holdings to a significantly more conservative arrangement, which we did.
Two years later, Daryl came back for a visit. Still keenly watching stock markets, he noted that the year before, the Toronto Stock Exchange Index was up 19.3%, and he wanted to switch everything over to 100% in stocks again. The good news had made him forget how he had felt only a short while before as his portfolio had been routed by two bad years of negative returns.
I pulled out the original risk assessment we’d done two years before and compared it to the one we had just done, where he said he was OK with super high risk investments. It was the tale of two Daryls – one burned in a downturn and one euphoric in an upturn.
“Which one is the truth?” I asked.
Daryl started laughing and said “OK, you got me!” He sheepishly remembered back to the feeling of panic attacks two years before, where he thought he was having a heart attack, and decided that he should probably be in the middle, somewhere between the two extremes.
The Truth Lies Somewhere In-between!
It was a great moment for me in understanding our psychology as investors. When markets are up – and have been going up for a long time – we can forget what its like to have a downturn. There are two ways to evaluate risk – the risk you can afford to take and the type of risk that keep you up at night thinking about firing your investment representative.
While I would love to tell you to focus on the first one, I often find that it’s the second one – the emotional side, thinking with your heart, that truly determines the risk you should take. As a financial planner, I’m always OK with you taking less risk, and sleeping better at night.
Like Daryl, the risk you should take might lie somewhere between the extremes you feel in down or up markets. There are lots of ways you can work with your investment representative to make sure your tolerance for risk is sitting in the right place in your portfolio.
Don’t just be happy with high returns – make sure you realize at a fundamental level that super high returns probably also mean you could have super high losses. It’s OK to give up on one in order to avoid the other. At the end of the day, money is just a tool to be used – not something that should affect the quality of your life.
If you have opened your year-end statements recently, you’ve probably noticed that 2018 was not a great year for most investors, and it might be keeping you up at night. One simple test to ask your investment representative, is ask them what a portfolio similar to yours did during the 2008 financial crisis. If you’re OK with the answer, your portfolio is probably structured in a way that suits you.
If the number they quote makes your heart palpitate, make some changes.
Once you get things lined up in a way that lets you sleep at night, I hope you wake up to croissants and pastries for breakfast – I know a guy who can probably supply you some, if I can convince him to give up the retired life!
Have a great 2019,