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Posted on September 13, 2018

Risk & Reality

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By Robert O. Graves, CFP® CERTIFIED FINANCIAL PLANNER™

 

Part of creating a Life Plan for clients requires assessing their risk tolerance.  I ask the following question:  “How would you feel if you lost 10 percent of your savings because of a market downturn?”

“I think I’d be OK with that”, a client says.

“How about this: if you had $1 million and lost $100,000, how would you feel?”

A blank stare tells me that the 10 percent loss, when put into dollars and cents, is far less palatable.  Prior to 2008, many investors didn’t understand the asset allocation risks they were taking.  As a result, their portfolios were focused on certain areas while neglecting others.  This may have prevented them from having a well-defined, diversified portfolio with alternative investments that may help protect it.

I hope that the recession will help people understand risk better than they have in the past and that they will understand the difference between long and short range planning; the more time you have, the more risk you can take.  The opposite is true as well: the less time you have, the less risk you should take.  Recognizing risk factors in a tangible way means that more of us will be conservative in our investments, which could benefit us greatly in the long term.

“But what about all the people who are about to retire and now can’t?” people ask me.

In my observations, many of the world’s most successful people never think of retiring.  I also made the case that the rules of retirement are rapidly changing.  Millions of people who are supposedly retirement age are working full-time – by choice.

Sadly, I regularly encounter elderly individuals who are bored and wished they had something to do.  So the fact that retirees may have to take on part-time work isn’t entirely a bad thing.  It’s tragic for some, whose bodies can’t handle the work, but manageable for those who could benefit from the activity.

During daunting moments, such as recessions and global crises, allow prior experience to be your guide.  It’s easy to forget previous events and convince yourself that the present is worse than the past.  And this highly connected world – where online, print, and TV news sources are under unprecedented pressure to cover the latest events and capture viewer attention – doesn’t make matters any better because they usually focus on the negative.

Many of us believed that the financial crisis of 2008 would ruin us.  No doubt, it’s one for the history books in its scope and depth.  But the market collapse pales in comparison to the surrounding circumstances of 9-11.

Unlike the weeks and months post 9-11, airports are open; buildings and baseball stadiums aren’t under imminent threat of terrorist assault; there’s no talk of World War III; and we’re not constantly being instructed on what to do if there’s a biological attack – all of which indicates that the future is far less scary than it seemed immediately after the collapse of the World Trade Center.

A Life Plan makes you the keeper of your own financial present and future.  It establishes your goals and allows you to remain focused on how you allocate our money.  It’s one of the most significant steps you can take to maintain optimism under the most difficult circumstances.  It’s no guarantee of financial success, but without one, you’re guaranteeing that when an unforeseen personal, national, or global misfortune takes place, you will be unprepared to take charge.

 

Excerpt from Robert O. Graves book, Your Life Plan: A Guide to Financial Freedom.

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