By Rick Helbing, CFP, ChFC
Philosophers since Socrates are believed to have said that being understood is the number one need of people.
In my last article I discussed what happens when clients revert back to
their natural behavior, in this case selling shares of Dodge and Cox International
Fund in 2008. Why did clients sell this fund?
You often hear advisors discuss the “risk tolerance” that a client has
toward investing. As a matter of fact, everyone discusses the tolerance for
risk and one way to determine a client’s risk tolerance is to complete a
questionnaire. Really? My contention is that is the wrong way to discover a
client’s tolerance for risk. The Financial DNA discovery process, according to
Hugh Massie, “validates the means of objectively discovering your natural
propensity for risk and using this information for making more empowered
financial decisions that will hopefully ensure that emotions are in sync with
rationality,” which will keep clients in their comfort zone, hence, not falling
back to their natural behavior.
A client’s risk profile should include propensity for risk and risk tolerance. Propensity for risk is how adventurousness clients are in their willingness to take chances or how daring they really want to be. The higher the dare, the potentially more opportunity; the lower the dare, the less opportunity (unless there is a certainty in success). Ambition is linked with dare – in other words, a client’s true willingness to pursue his or her goals.
For those with high ambition who are more driven to set and meet goals, once goals are met, quality of life may change. For those with low ambition, well, you are probably getting the picture.
Risk tolerance (an over-used way to describe one’s risk) is living with the consequences of your decisions. So why did clients sell the fund during the market drop in 2008? Because they felt uncomfortable, reverting back to natural behavior. A negative signal (behavior) triggered a knee-jerk reaction, all from an emotional center of the brain called the amygdala. The client’s emotions were hijacked, creating poor decisions and thoughts, loss of clarity and blind spots (you know, you said your propensity for risk was high, but it really wasn’t).
Discovering your natural and learned behavior along with solid information, education, and trust, which only comes with understanding oneself and being understood by your advisor, will assist in potentially stopping your emotions from being hijacked.
For more blogs by Rick Helbing of Suncoast Advisory Group, please visit http://www.freshfinancialideas.com.
(Information and research from Hugh Massie, Financial DNA, John Wiley and Sons, 2006, DNA Behavioral International)