Philosophers since Socrates are believed to have said, that being understood is the number one need of people.
In my last article I discussed what happens when a client reverts back to their natural behavior, in this case selling shares of Dodge and Cox
International Fund in 2008. Why did clients sell this fund? You often hear advisors discuss the “risk tolerance” that a client has toward investing. As a matter of fact, everyone discusses the tolerance for risk
and one way to determine a client’s risk tolerance is to complete a questionnaire(Really?). My contention that is the wrong way to discover a client’s tolerance for risk! The Financial DNA discovery process, according to
Hugh Massie, “validates the means of objectively discovering your natural propensity for risk and using this information for making more empowered financial decisions that will hopefully ensure that emotions
are in sync with rationality”, which will keep a client in their comfort zone, hence, not falling back to their natural behavior.
A client’s risk profile should include Propensity for risk and Risk tolerance! Propensity for risk is how adventurousness a client is through their willingness to take chances or how daring they really want to be,
the higher the dare, potentially more opportunity, the lower the dare, less opportunity unless there is a certainty in success. Ambition is linked with dare, in other words, a client’s true willingness to pursue their goals.
A high ambition, more driven to set and meet their goals, once goals are met, quality of life may change! A low ambition, well, you probably are getting the picture.
Risk tolerance(this over used way to describe one’s risk) is living with the consequences of your decisions! So why did client’s sell the fund(during the market drop in 2008) in the previous article, because they felt uncomfortable, reverting back to natural behavior, a negative signal(behavior)
triggered a knee jerk reaction, all from an emotional center of the brain called the Amygdala!! The client’s emotions were hijacked, creating poor decisions and thoughts, loss of clarity, and blind spots(you know, you said your propensity for risk was high, but it really wasn’t!)
Discovering your natural and learned behavior along with solid information, education, and trust, which only comes with understanding oneself and being understood by your advisor, will assist in potentially stopping your emotions from being hijacked!
(Information, research, from Hugh Massie, Financial DNA, the book, John Wiley and Sons, 2006, DNA Behavioral International)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.