Episode 8: Understanding (or Misunderstanding) Risks

ABOUT THIS EPISODE

On this episode of the Build Your Life Podcast with Financial Expert John Browning we're chatting about risk tolerance when it comes to investing.

When should you take risks and how much risk is recommended? This is a commonly misunderstood topic that needs to be addressed in your retirement planning.

For more information, visit www.GuardianRockWealth.com to learn more about what John can do for you.

Welcome to the building your life podcast with John Browning. Building your life is a relaxed and unedited conversation with financial expert John Browning. Well, John, welcome back to your own podcast. How are you doing, sir? I'm doing well. How about you? You know, things are very good here. It's a beautiful day. I'm down in a little rock and the trees are budding and it is just gorgeous. So I'm just loving it. Yeah, we have no buds here that you'd see our first we did see her first Robin, and I'm headed out to our offices in the Hawaii next week. So so it'll be it'll be much warmer there, so well be. I like that second office in Hawaii. I need to figure out how to do that. That's pretty cool. Yeah, it's all right. We'll have to talk absolutely. I'm sure we will while I'm down there. I'm sure we have a we'll have a recording or two. Yeah, that'd be good. Yeah, speaking of talking, let's talk today about some risks. Last ...

...last episode we talked about the emotional aspect of investing and building your portfolio, especially in a market that's up and down and being a little crazy as this market is right now, HMM. But at the same time, let's talk about risk, risk tolerance, and how do you how do as an investor or as an advisor? How do you counsel different people about risk, and how do you look at their personalities, because not everybody is the same with risk on my wife and aren't tend to be very conservative. How do you counsel people in when to take risk and how much risk to take? With mine, this is a touchy subject and it's a very good one to address. A lot of a lot of financial advisors have issues even discussing it because it's misunderstood by many. It's misunderstood to the point where when I chat with an individual, they may they may tell me up front, oh, I...

...want to be aggressive, I want to make as much money as possible, and then you begin to describe what happens when you are aggressive, what tends to happen when you are aggressive. It can be great and it can be great for a long time and then you have periods like we've just experienced with the coronavirus and the oil price worse, and suddenly those aggressive investors have lost thirty, forty, maybe even more, percentage of their hard earned money that they they worked a long time and worked very, very hard for. Suddenly they're not quite in tune with with having that much risk and they get upset and they have sleepless nights. And then there are others on the other complete spectrum of things that I don't want to take any risk or very, very little risk, and I begin to explain to them that there's actually a risk in not risking enough. There's a lot of risks in there. But the...

...risk of just keeping your money and say a checking account earning you maybe a quarter of a percent, if even that anymore, is that you're not even keeping up with the rate of inflation, so that you know two hundredzero or whatever it might be in your checking account is really worth ten years from now, a lot less than two hundred thousand. It just doesn't buy as much, but you know it's been safe if it's still there. But it's like, essentially you could just put it in your mattress or bury in your backyard and there's a rest that because unfortunately, as we get older, and this is better than the alternative, is you're still around, but you you need more things done for you. I'm you know, even at my age I'm not nearly as thrilled about getting up on that ladder and payment painting my house right and as you as you, as you get older, you want people to do that for you and that lost more money than you used to spend. And things you do end up spending more money. It's many people think you spend less in retirement. What we actually find in reality is because you...

...have more time and because you want to buy more services, because you don't want to do that anymore. You can't do that anymore, it actually begins to get more expensive. So it's something to keep in mind. That is a different type of risk. That's very interesting because I talked to a lot of people. As we look out at retirement, even if it's twenty years away to go, you know, my standard of living is going to be the same as it is today. Maybe it is, you know, because instead of fainting for a mortgage, maybe on pain for somebody to paint my house. But it's the mindset that we're going into it with and I liked how you said there are really risks on both sides of that equation, too much or not enough, and there's always a balance and it's very much relates to our last conversation about emotions. Right, you can go up and down. How does risk play into it as you deal with age groups of people? So if you got somebody who's twenty eight, thirty five versus somebody WHO's fifty five or sixty, is your counsel different to them because of stage of life? Has that play into risk and risk hold? Well, it's kind...

...of time horizon. Risk, right, is is when you plan on using the money that you've saved and and plan for and, and I say I tend to separate that out. You know, what are you going to need in the next year to two years, and we keep that very as risk free as as we possibly can. Maybe not in actual cash, but we keep it in something very conservative. I also counsel folks. Again, that word that you used is so important, and that's balance, and that's a big part of my job. Is, you know, again, the easy part for me, because I've done this for thirty years, is is to meetage the portfolio and get to the outcome that we're looking for. You know that that's the part that I you know that I excel at that, that I can do, but menaging your the client. It's risk tolerance, their emotions. You know, I'm I put my hand on either side of the...

...seesaw and I try and keep them balanced. Yeah, and no matter what's going on in the market, to take the appropriate actions to keep them balanced and consistent. Balance and consistency is really key. Yeah, another and that's great. And is that part of how you help your clients manage that risk? I you know, I've heard the term rebalancing a portfolio and things. Is that all part of the risk management? That's absolutely right. That's rights. As one portion of your portfolio is not doing as well, you want to do, generally speaking, you want to do tin of the opposite of what your your emotions are telling you to do and you want to actually put more money towards that portion of your portfolio that's not doing as well and and it's very hard to do emotionally. And you want to you want to sell or reduce the exposure to that asset that has been doing really, really well. Right, it just really, really tough. But we did that actually in most of our clients portfolios earlier this year. The equity portion and a...

...few of the the individual securities that have done extremely well. We're getting out of balance to the upside. So we trimmed to those and we didn't know, we couldn't have predicted that the coronavirus would happen, but sure enough it did, and those clients are very thankful that we had that discipline, consistent, balanced to approach and took a little bit of that off the table and put it in something more conservative right, because again you've got that long term perspective. You're looking we talked about this in three or four episodes ago, of meeting with replients, talking with replients about what's that in the goal, where we heading, and your job is to help get them there, and that's part of being, in a sense, disengaged emotionally that you are because of your position. You can make those moves. I'll say easier. I don't know if it's easier, not more easily. More easily, that's it. Then somebody who's doing it themselves, because we would do just the opposite. I'd say, man, that things not performing, I'm leaving, I'm...

...going to where the money is, and then it would turn on me and then I'd be sitting there, gone really, and that's that's the beauty of having somebody like you in the picture and somebody who understands the the the whole balancing act, the risk tolerance and how do we manage that and with the emotions and everything. So how do you know how much risk you should take and and at what phases in life? So, generally speaking, younger people can take more risk because they've got longer time frame in front of them to make it up if it gets lost. That generally speaking, mad that is correct, although I will say that I have, I have met and are currently have his clients, some young people who are still very risk averse and that comes from an emotional place of how hard they worked to get the money that they have out. There's also a really interesting phenomenon that basically there's a sort of a rule of investing that we almost jokingly say, but it but...

...it's absolutely I found it to be true, is that if you have a couple Hundredzero, you want to make more, you want to be aggressive and make more. If you have a couple million dollars, you want to keep it safe and you don't want to lose it. So it's interesting. I found that those with with bigger assets actually are sometimes more risk averse. HMM, but again it's really very individual thing. Well, it is, and I'm I would assume you've got some kind of question are or some process that you're walking clients through when they first come on with you to to determine where they are in that risk tolerance scale and because we're all going to come to you say, John, we want to have five million dollars in thirty years or whatever. Well, that's all great and good, but how are you going to manage that risk? And I mean do you have a process, you have questions you answer? How do you determine the risk level or of...

...a client? We do have a questionnaire and I would say limited, limited results with that, because what someone tends to tell you is what they think they should tell you, as opposed to what reality is in your chest, in your heart, in your gut and what it really feels like to lose fifteen for twenty percent, because there's a ton of studies out there that will tell you, and I found it to be true with myself as well, I don't get the seeing like I get excited if I make a lot of money right, but I get a lot sadder, a lot more upset if I lose even close to the amount of money that so so that that fear of pain, that pain response, is much stronger than the joy of feeling great about doing really well. Yes, and you see that right now, right last year, I mean people were up thirty percent in the year. I mean that was that was fantastic. But suddenly there they just lost that thirty percent, right and right, that hurts a lot worse. So something...

...else that we find. And so we try and really get to know the person, get to know the individual. Aside from all the direct questions that you might expect, we try and really just have a conversation like you and I are having now, to really get a feel for what there is, tolerance really is. And the truth is we don't really know until the first time the market goes down and and we talk to them and see how they're really feeling. Well, and and that's good and once again, a great reason to have somebody like John on your team is to have somebody to reach out to talk with WHO's an outside perspective, understands and you've been through this just a couple three times, John. Over thirty years you see markets come and go and you seen clients stay the course, rebalance and make sure that their emotions are not getting the best of them, and having having somebody like you in the corner is an awesome thing. So let me encourage our listeners to reach out to John, get a copy of John's book and make sure that you're you're planning your your life and your portfolio. And that's what John's...

...really really about, and that's why these conversations with clients it's so important, because, John, you really do want to get to know your clients, because it makes a difference, because this market is going to go up and down. The reality is I still have children who, ten years from now, need to go to college. I have a retirement's coming in fifteen or twenty or thirty years. How are you going to get me there, John, and if those conversations that plan into everything right, that's right, exactly right. Well, that's good. That's why you you. I love what you do, with helping people build a life and not just a portfolio. You're great at both and that's a great combination. So thanks, John for helping us today to understand a little bit more about risk. Make sure if you're listening to this episode that you go back one episode and talk about how how we talked about a diversification and the emotional aspects of investing. We talked about risk today and we'll talk about some other fun things in an upcoming episode. So thanks for being with us today on John's podcast. John, you go have a great week and we'll talk to you soon, maybe from Hawaii.

All right, so thanks for listening to the building your life podcast was. John Brownie. Be Sure to subscribe to this podcast so each new episode will be sent to you automatically when it is released. Have a terrific day.

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