Comments on: Financial Planners, Volatility, and Asset Allocation

By: Carl Richards

Carl Richards — Fri, 01 May 2009 18:47:25 +0000

It is what kept our ancestors from being eaten by sabertooths a long time ago.

By: Carl Richards

Carl Richards — Fri, 01 May 2009 18:46:13 +0000

agreed. BUT, in 15 years of advising clients and studying behavioral finance I actually think we underestimate the role that emotion plays for most people.

There are people that are hardwired in such a way that fear and greed are not an issue, but for most of us IT IS GENETIC.

By: Mike

Mike — Fri, 01 May 2009 15:52:14 +0000

Hi Carl.

Thanks for taking the time to reply.

For what it’s worth, I’d agree that there’s no chance whatsoever of entirely eliminating the emotions that go into investing. However, I really do think that we can train our minds to respond with one emotion as opposed to another. Or, at least, we can train our minds to mitigate some of the emotions that arise due to certain events.

For example, how many financial planners do you know that feel scared when their portfolios decline by 20%?

By: Carl Richards

Carl Richards — Fri, 01 May 2009 15:15:03 +0000

Mike-

This is a great conversation. Thanks for taking it on. While I agree that it is the job a good planner to educate clients on the impacts of the trade-offs. One thing to be very careful of is this statement:

“…increased knowledge about the cyclical nature of markets and the actual (as opposed to purely psychological) consequences of volatility leads to increased volatility tolerance.”

Investment “risk” and how you FEEL it is an emotional problem. Education/knowledge might help, but for most people you will not solve emotional problems with logic. You can throw all the fact & figures you want at this and people will still FEEL scared when they open their statement and see a 20% loss. When you are scared, you want out. It is part of being human. We want to run from what causes us pain, and get more of what is giving us safety/happiness.

So it is important to be educated. But it is also very, very, important to understand that you will FEEL scared and develop strategies to deal with it without making the BIG mistake.

Make sense?

By: SJ

SJ — Thu, 30 Apr 2009 23:04:21 +0000

It’s fine if someone wants to dodge volatility, but it should be the job of an advisor/planner to point out what this means.
“You’ll have to die earlier / Save more / etc.”

In return they are all trade-off’s… do whatever makes sense for you.

Is the extra stress associated w/ volatility exceed not drinking coffee everyday? (hey that sounds like it’d be doubly health lolol)

By: Mike

Mike — Thu, 30 Apr 2009 19:53:33 +0000

Mark, I’m not saying it’s the wrong decision.

I’m simply saying that before we assume it’s the right decision, we’d better make sure that the investor truly knows what the consequences are most likely to be.

By: Mark Wolfinger

Mark Wolfinger — Thu, 30 Apr 2009 17:07:06 +0000

Some investors insist on zero volatility. How can you believe it’s ‘wrong’? It clearly leads to less than ‘the best’ results in the vast majority of, but not all, situations.

It’s wrong for you and me, but that’s not the same thing as its being wrong for anyone else..

By: My Journey

My Journey — Thu, 30 Apr 2009 16:12:24 +0000

I couldn’t agree with you more. I work for a firm that deals heavily with investments, and when it hit the fan starting last year, our planners lost very few customers. This was because they are all taught – TO TEACH – their clients that the markets go both up and down.