I am a cautious and conservative man by nature. As a financial advisor in Boca Raton, my job constantly requires me to think of the concepts risk and reward. If I do not feel comfortable with something, I have turned to education and not blind trust. So when investors say “I cannot afford any risk,” I feel that it is my duty to begin with education that I have received about investing with a no risk mindset. The reality is taking “no risk” might be more risky. Here is an example:
A client wants to invest some excess cash today and wants absolutely no risk to their principal. This client has indicated they do not need this money for 5 years but would like to avoid any insurance products. The advisor decides to look at a 1-year investment with no risk (maybe a 1-year CD) which is currently earning between .5%-1%. After taxes that number will be slightly less and that is before subtracting inflation, which is currently hovering around 2% in the United States. Ultimately, this client might not be losing principal but they are certainly losing purchasing power, which becomes ever so important, especially in retirement. Unfortunately, this is not seen on an account or bank statement. It becomes a very real problem every time this client goes food shopping or traveling.
At Feller Financial Services, our educational model would view that client as a perfect case study for education. We would start with explaining risk tolerance and the idea of being a conservative investor rather than taking “no risk.” Riskalyze, a premier risk based software, places risk scores between 0-100. And let’s assume that client goes through the software and comes up with a score of 20, which, historically, is a very conservative individual.
This is a good indicator of how much risk someone is willing to take, and from there we can decide together what percentage of that portfolio should be dedicated to Blue Chip Stocks, if suitable, and then utilize a fixed income portfolio for the remaining percentage, also if suitable. A 20/80 portfolio consisting of 20% in Standard and Poor’s 500 equities and 80% in Government Bonds. As a hypothetical example, a portfolio over the past 5 years has earned roughly 5% and was completely liquid to the client at all times. During a period of 5 years with very little volatility and risk of principal that client decided it was worth the small amount of risk for the excess return.
By communicating and educating, that client is left off in a better long term situation without compromising who he/she is as an investor and his/her goals for the excess money by using education and language to explain the difference between conservative and no risk.
Next we will dive into the idea that Insurance Products may not need to be reviewed annually…