So I’m sitting with a corporate exec the other day going over her 401(k). She’s a middle-aged woman who definitely knows her stuff when it comes to finance and investments. She gives me all the usual data – you know, currently salary, current retirement savings value, annual contribution, expected Social Security, retirement date. I put it in the spreadsheet blender and – presto! – out comes the rate of return she needs from now until her last day of work in order to retire in comfort. I call this her “Goal-Oriented Target” and it is quite achievable at somewhere between 4 to 5 percent.
I’m about to move on to the next step when, out of the blue, the CEO of the company ambles by. He’s what some might call a “ragged veteran” of sorts. He’s seen a million-and-one investment advisors, hopping from one to another whenever the underperformance bug hit. No doubt familiar with all the tools of the advisor trade, he confidently asks the woman, “This is all fine and good, but how does this relate to your risk tolerance?” She politely smiles a respectful smile and says nothing.
I stop dead in my tracks.
Sensing the woman knows more than she’s letting on, I immediately congratulate the old man for asking the perfect question to follow up our half-hour of rigorous mathematical calculations. I turn to the woman and ask her if she’s familiar with the risk tolerance test administered by brokers, mutual fund companies and virtually any website remotely connected to investing. She says, “Yes.” Then I ask her, rather bluntly (which was OK because she sensed where I was going), “Would the results of any of those tests change your Goal-Oriented Target?”
“No,” she said, understanding perfectly my point.