I recently wrote about ‘investing versus speculating’, since then I have been asked why I quoted from a text written in 1949. Well I am reading anything I can lay my hands on to build easy ways to educate my clients; they want to understand the investment advice we give, they want to share the responsibility for the decisions made. So, I need to educate and keep educating. While I do read a great many modern texts, I find sometimes that if I want to get back to basics some of the earlier authors say it well.
Take for instance, the need to understand a client’s tolerance to risk before we provide investment advice. There seems to be so many ways to establish how tolerant a client is to risk. But first, what does the client say risk is? It is the possibility that they will lose all or some of their invested capital.
I noted the approach taken in the late 1950’s; it was based on life cycles. Burton Crane wrote in 1959 that “risk was an assumption based on life cycles, thus the different levels of risk were established as “high risk situations for bachelors with more than enough to live on; growth situations for the young husband building an [estate], chance-taking commitments for the older man whose children have left the nest, and safety for the person whose earning days are over”
Perhaps a little humorous today and I wonder where women came into the equation? But at base, this may well still ring true in terms of investment policy today. I think risk is more about how much each client understands about asset classes and diversification across those classes and, to add a further buffer against risk, diversification within those classes, so I need to educate them about these principles.
As I said; our fears about investing are based on the risk of losing capital, overcoming this fear starts with understanding, and understanding comes from education. The education journey is at the core of a client’s relationship with an Adviser and this is an ongoing journey that leads to the client, the investor, knowing enough to be able to provide the Adviser with informed consent to any advice given.
It is not uncommon for a client’s tolerance to risk to be a direct result of someone else losing money, rather than their own investment journey or knowledge about investments. So, we come back to education, knowledge reduces fear, we don’t fear what we understand, because understanding means we can manage the situation.
Why am I saying this?
When you seek advice remember it is your money your future
You will manage risk better if you have a better understanding of what investment risk is and why there are risk; you won’t make decisions because (i) you have been told you should or (ii) you are afraid; but because you know what the risk is and how to diminish that risk.
If you do not understand the advice you are given by an expert, I encourage you to ask for further clarification, ask more questions.
Quick tip; keep a notebook for your investment journey, anything you don’t understand jot down a question you want to ask your adviser. Take your notebook to your client/adviser meetings and keep notes, write down the answers to your questions; it’s a great way to learn and a great way to retain control of your own wealth.
Eleanor Dartnall (AR 285743), & Dartnall Advisers Pty Ltd (AR 299568) are Authorised Representatives of Magnitude Group Pty Ltd • ABN 54 086 266 202 • AFSL 221557 •
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