Most advisors have probably had an interesting dialogue with their clients this year about the markets, just as they did in 2008 and 2009. However, today’s dialogue is likely to be more about not making as much as the market did, rather than not losing as much as the market.
It’s hard for many investors to really understand the big picture of investing. That’s partly because of our industry’s confusing marketing tactics which give people the idea that investing is akin to winning big and quick in Vegas. Everyone wants that “silver bullet solution“or the chance to “have their cake and eat it too,” but, in reality, that’s not the way it works.
This is where the real value of an advisor becomes most evident:
What Is ‘Risk?’
Defined by dictionary.com, risk “is the hazard or chance of loss,” which defines pretty much everything in life, doesn’t it? Everywhere you turn there’s a form of risk: there’s a chance of having an accident when driving to work, or hurting yourself from simply stepping out of bed.
But why is it that when it comes to their money, clients emotionally lose the ability to quantify that risk in their minds? I believe it’s because most don’t have a simple understanding of the term ‘risk’ relative to the actual investments they own.
Therefore, I try to relate to our investors that as advisors, risk is based on how we manage our client’s wealth, and is nothing more than volatility, rather than true risk of loss. Loss is defined as something that’s “lost or never coming back,” rather than diversified volatility which, when we’re patient, has so far always come back.
It’s important that clients understand that risk, in most cases (assuming you’re investing in diversified strategies with mutual funds or ETFs) risk is more related to volatility than the true possibility of their investments’ total bankruptcy.