Risky Business: The Possibility of Losing Money and the Proverbial ‘Grand Scheme of Things’

Two weeks ago, I focused on the statistics behind peoples’ successful wealth management when working with an adviser.

As promised, after looking at the 12 rules that govern investor behaviour, I will be getting to the bottom of things and try to discover how one can actually find a good financial adviser or investment counsellor.

But until then, we’ll stick to deciphering the rules.

Dr. Crosby states that the second law that governs our behaviour as investors is: Risk is a permanent loss of capital. He goes on to say that “risk is not a paper loss… [nor is it] underperforming the benchmark. Real risk is the probability of you permanently losing your money. Viewed thusly, those with a long time horizon and diversified portfolios are taking on very little risk indeed.” (Emphasis added)

I seem to come across higher risk aversion more often than not, especially in people too young to be so afraid of a roller coaster ride. And what amazes, dumbfounds, and actually disappoints me the most when I encounter these cases is that when I begin to ask a few simple questions, one of the first responses tends to be: “My adviser never told me about that.”

Dr. Crosby emphasizes, time and time again, that an adviser is more of a coach than an actual teacher or economic expert. And I can’t help but emphasize, myself, the need for a big picture, holistic thinker who actually stands in your corner and desires your victory.

Please allow me to illustrate with two examples.

A colleague of mine recently told me that he had averaged a 1.5% return on investments in a TFSA that he opened at a bank a few years ago. I asked him if he was happy in economic limbo, neither hoarding the cash in his mattress, nor maintaining a minimal conservative portfolio that could keep up with the average rate of inflation (3%). He told me that he didn’t that know such conservative portfolios existed, and that the prospect of making money motivated him far more than losing it did. In brief, he wasn’t as risk averse as he thought he was.

Without any judgements, I ask myself: are certain bank advisers quick to offer underperforming portfolios because they’re easier to sell, and because they simply don’t want to take the time or make the effort to coach their clients to their fullest potential?

Case study #2 was a friend in his early 30’s who didn’t handle 2008’s uppercut too well, and pulled a lot of money out of his investment portfolios when global markets plummeted. I asked him if he knew that if his adviser had coached him properly, he would have pulled out a historical chart of market activity, indicated the gradual ascent over the decades, and asked him to patiently wait?

You don’t lose when the markets drop. You lose when you haven’t considered your life situation as a whole, inadequately built portfolios that don’t suit your needs and preferences, and panic when temporary havoc reigns.

Had case study #2 been an 89 year-old, I would have understood an early retrieval because of the greater likelihood of passing away and a more immediate need for disposable income, but if your doctor’s checkups are indicating that you have another good 40 to 50 years in you, then what really is your excuse?

Find a coach who knows which rides you can handle, and reminds you to stay seated with your arms inside the car at all times until it has come to a full and complete stop; a coach who knows which opponents you can handle, which punches to throw, and who won’t let you roll out of the ring the first time you’re knocked down.