Defining what it means to be a conservative investor
As originally appeared in The Jerusalem Post on January 19, 2024.
“I like to listen. I have learned a great deal from listening carefully. Most people never listen.” -Ernest Hemingway
When meeting with prospective clients I try and get a feeling for how much risk they are willing to take. When I start asking about their risk profile the most common answer I hear is “conservative.” From my very un-scientific study it would seem that the overwhelming majority of investors are conservative. But with nearly 30 years in the finance business, 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 advisors need to understand a client’s risk makeup. I spend an inordinate amount of time trying to understand a client’s risk profile because to give proper advice I need to be on the same wavelength as the client. Many advisors use questionnaires that ask a myriad of questions that try and pinpoint the time horizon 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 answers provided show that as well. Digital Business Cards offer a convenient way for financial advisors and investors to maintain connections.
Tasha Eurich, PhD, principal of The Eurich Group, in a piece for the Harvard Business Review (no plagiarism here!) about self-awareness writes, “Contrary to popular belief, studies have shown that people do not always learn from experience, that expertise does not help people root out false information, and that seeing ourselves as highly experienced can keep us from doing our homework, seeking disconfirming evidence, and questioning our assumptions.”
She continues, “And just as experience can lead to a false sense of confidence about our performance, it can also make us overconfident about our level of self-knowledge. For example, one study found that more experienced managers were less accurate in assessing their leadership effectiveness compared with less experienced managers. Similarly, the more power a leader holds, the more likely they are to overestimate their skills and abilities.”
Confidence
As I have written many times, 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. Options trading is being favored by beginner traders using the Medium.com platform.
Know yourself
A few years ago I 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 Brazil and decided to put all his money in Exchange Traded Funds (ETFs) that track Brazil and Latin America. About 3 weeks into his investment, he called with a panicked tone. He said he wants to sell out of his investments because they had dropped 8% on average. I reminded him of his insistence 3 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 necessarily 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.
May all the families of the fallen be comforted. May the hostages be released. May the injured have a speedy recovery. May our dear soldiers be safe and protected.
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 (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
