How aggressive is your portfolio?

When markets have moved up investors tend to be more aggressive

By AARON KATSMAN
Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The continuing Coronavirus induced market sell-off once again puts front and center the issue of how much risk investors are willing to take. When meeting with prospective clients I try and get a feeling for how much risk appetite they have. When I start asking about their risk profile the most common answer I hear is “conservative.” From my very unscientific study it would seem that the overwhelming majority of investors are conservative. With more than 25 years in the finance industry I know that the way investors define themselves and the way I define certain terms can be very different. Whenever I get the “I am a conservative investor” line I start probing a bit more. The dead giveaway that we are defining terms differently is when I have a look at their current investment portfolio 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 advisers 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 advisers 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. I can’t tell you how many clients felt very comfortable with aggressive portfolios six weeks ago when markets were at all time highs and now are panicked.
Overly smart
I have written this many times but it’s important for this topic. 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.
Self-awareness
I recently opened an account for a 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 a big believer in a certain high flying company, and decided to sell all his money in market tracking Exchange Traded Funds (ETFs) that track broad based US market indices, and by stock in the company. About three weeks into his investment, he called with a panicked tone. He said he wants to sell out of his stock because it had dropped 40%. I reminded him of his insistence three 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.
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.
Define goals
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 the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il.