How you feel about your investment is a critical factor for your advisor to understand. We talk about it when we talk about risk, and it impacts our portfolio design. We sometimes refer to it as your “willingness to take risk” but it’s important to remember that willingness and emotion are two very different beasts.
My parents both worked as mental health professionals and that influenced how I was raised. One of the perks about growing up in a space where mental health was emphasized is that we talked a lot about what was true and what may not be true regarding our emotions. With my parents’ assistance, we would pause, trying to weed out the self-sabotaging feelings versus the ones that served us well.
This is hard (almost impossible) to do in moments of crisis. In a crisis we are fighting for our lives, and our instinctual brain is sucking up energy, leaving our rational brain less space to process or make decisions. Even worse, in a financial crisis, when you call your advisor, they cannot deliver any concrete expectations. Every time an advisor talks about how historically the market has recovered; we are obligated to counter that by saying that past performance is not indicative of future results. Your advisor cannot make any promises. It feels like you have no control, and the only instinctual way to stop the bleeding is to … go to cash.
This is the situation that we are trying to avoid when we talk about your “willingness to take risk.” This isn’t a small question. As the chart above shows, over a 40-year period, removing $2,000 every time the market dropped 8% in a month vs adding $2,000 was the difference of over $1 million dollars. I am, as you may guess, obligated to tell you that the past may not look like the future, but I do think the historical context illustrates the possible consequences.
The time to figure out your emotions are before or after the hard thing. As a first step, take a few minutes and recount your investment experience during the 2008 financial crisis and the COVID market crash. What did you do? What do you wish you had done differently? What would have made you feel better or worse? After this review, call you advisor and tell them your story. We learn so much more from your experience of an actual event than we ever can from you answering survey questions about your willingness to take risk.
One of our strengths as humans is that we can learn to identify self-sabotaging emotions. We can create plans with our most rational brains, and then in a crisis, we can point to the plan to remind our emotional selves that we don’t really need them right now. We have done the work. We are ready for the crisis. We figured it out when we were all thinking clearly and now we just need to stick to the plan.
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