Enjoy the ride!
Keeping investors engaged in a still-volatile market
BY Deena Katz
vested. The downside, however, is that inflation erosion may result in clients not being
able to satisfy their goals and objectives. Your
job is to help clients balance these conflicting risks.
The way we describe risk tolerance to clients is “that threshold of worry and misery
that you can live with, without calling us to
say, ‘I can’t stand it anymore! Sell me out and
take me to cash!’” Next, we need to help our
clients distinguish between risk tolerance and
risk capacity, which is the amount of risk your
client can sustain financially. Most people can
afford to blow a dollar on a lottery ticket, for
instance, but few can afford to put $40, $50 or
$60 a week for this purpose without sacrificing
some other, more beneficial purchase.
Finally, there is risk demand — the risk you
need to take to meet your financial objectives. Current and future resources, current
economic forecasts and the demand on resources going forward dictate risk demand.
Frequently, your client’s risk capacity, tolerance and demand are not in alignment.
This is when you can do your best work, setting up what I call a negotiating session. My
partner sums it up this way: “Do you want to
eat less well or sleep less well?” When you
find a balance, you can make a good plan.
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But before we can work on how best to
endure the ride, we first need to determine
whether your client needs to ride the roller
coaster at all.
after two years of a financial roller-coaster ride, I’m sure you’re
searching for something new to say to clients to keep them
seated in the cart, no matter what direction the market seems
to be flying toward (or sinking into) at the moment. While I wish
I knew the magic words, the best I can do is share the thoughts
I’ve been mulling over lately.
The long-term risk for most clients is inflation. No matter how low inflation may go,
the annual rate, presently at 2. 2 percent, has
averaged about 3. 4 percent over the past 100
years. Over time, it has an erosive impact on
portfolios. Maintaining an equity position will
Deena Katz, CFP, is an associate professor
in the Division of Personal Financial Planning at Texas Tech University, and chair of
Evensky & Katz in Coral Gables, Fla. This
article originally appeared in Financial Planning magazine, a SourceMedia publication.
help mitigate this loss. So we know that most
clients need to get on the roller coaster.
But which one?
Must it be Australia’s Tower of Terror with
its 100 mph top speed, or can it be a milder
ride, like Disneyland’s Space Mountain?
Nobel Prize-winner Daniel Kahneman, in
his Prospect Theory, tells us that individuals feel the pain of losing a dollar twice as
intensely as they feel the joy of gaining a
dollar. Therefore, investors will seek to avoid
loss, rather than take on risks to make more
profits. We are not risk-averse; we are, in fact,
This might mean that a less volatile roller
coaster might keep your client in the cart and
tolerating, if not enjoying, the ride. So if you
design a portfolio for less volatility, there’s
a better chance that your client will stay in-
Conversations about risk must start the day
See THE RIDE on
you meet your client, not when his expec-
tations have not been met and he’s feeling
buyer’s remorse. During volatile markets, my
favorite question in our risk coaching dia-
logue asks clients to select the statement that
reflects their preference:
“I would rather be out of the stock market
when it goes down than in the market when
it goes up (i.e., I can’t live with the volatility
of the stock market).”
“I would rather be in the stock market
when it goes down than out of the market
when it goes up (i.e., I can live with the stock
market volatility in order to earn market
We explain that we believe that, over time,
the domestic and world economy will trend
up. We also believe that, over time, stocks will
AMERICANS SAVING FOR
RETIREMENT, NOT COLLEGE
BLOOMINGTON, ILL. — Rising tuition fees
and the uncertain state of the economy
are causing more people to put their
own retirement savings ahead of their
children’s college education.
A new survey from Country Financial
found that the number of Americans
who think college is a good financial
investment plunged to 64 percent,
down 16 points from last year and 17
points from 2008. The sentiment about
higher education coincides with a shift
in saving priorities. In a reversal from last
year, most Americans say that their own
retirement (43 percent) is more important
than saving for their child’s college (41
percent). Those who say they are unsure
about what’s more important increased
four points to 17 percent.
Nearly one third ( 31 percent) of Ameri
cans borrowed money to pay for their
education, 64 percent of whom have
completed paying off their loans. Further,
of those who borrowed, half say it had
little to no impact on other life decisions
like marriage or buying a home.
A majority (65 percent) say that par
ents should be responsible for paying
part of their child’s college. Eighteen
percent believe parents should foot the
entire bill, while 13 percent think parents
should not pay for any college costs.