When you meet with an Investor Coach, the main objective is to get to know your priorities and goals. You will be asked a lot of questions to better understand your needs. The answers to the questions usually depend on the needs, temperament, and available resources of each individual or family. The first step is to attend one of our regular coaching events. Second do an investor inventory with one of our coaches. They will go through the 20 must answer questions every investor should know. In addition to those questions you need to answer the following questions:
What are your investment goals? In other words, “What do I want the money to do for me?” For example, an investor might need to have additional income, to meet current living expenses. Other common needs include saving for long term goals such as retirement, a child’s education, a dream vacation, or for a quickly available source of emergency funds.
How liquid does the investment need to be? The term “liquidity” refers to how quickly an investment can be turned into cash, without losing any of the invested dollars. The question might also read, “When will the money be needed?” For example, investments meeting longer term goals such as retirement generally do not need to be as liquid as those designed to hold emergency funds.
Is the skill and knowledge needed to manage the investment available? An investor may not have the specialized skills and knowledge needed to properly select or manage an investment. In such instances, professional investment advice, or investments where such advice is available, should be pursued.
At some point the talk will turn to your “risk tolerance” or “risk profile.” You may also receive a questionnaire intended to gauge it. Well, it seems simple enough: the advisor is learning how conservatively or aggressively you would like to invest. But actually, a risk profile signifies more than that.
What is your profile? We use a few model portfolios which adapt for the unique needs of each client. Your risk profile indicates which of these model portfolios might become a good basis for your portfolio.
Investors are usually categorized as “conservative”, “moderate” or “aggressive”, with in-between categories of “moderately aggressive” and “moderately conservative” also applicable based on questionnaire responses.
How conservative are you? If you absolutely do not want to risk losing money, and if your first priority is consistent income to live on, you are a conservative investor. If these are your concerns and you are retired or about to retire, you should not be offered high-risk investments. If you retire with an aggressive portfolio and your investments tank, it could take (many) years to rebuild your savings, years you might not have. However, many pre-retirees and new retirees are moderately conservative – they are cautious with money in their lives and don’t want to take on a risky portfolio, but they still have a need to accumulate assets because they have either started saving for the future too late or lost assets as a result of market downturns or poor or unfortunate financial decisions.
How aggressive are you? Aggressive and moderately aggressive investors commonly want to match or beat the stock markets, or save for retirement at a highly accelerated rate. Some are “market junkies” who watch Wall Street on a daily basis. Most of them expect to build substantial wealth someday, are young or in the middle stage of life, have NOT been hit hard financially as a result of investing, and many have substantial income or savings. The moderately aggressive investor is willing to wait a bit longer to reach his or her goals, while the aggressive investor tends to be in a hurry, by comparison.
Who is the moderate investor? Typically, the moderate investor starts investing around the time of major life events – that first stable job with a corresponding 401(k), a marriage and/or the start of a family. Often, the moderate investor is a younger investor saving or investing for long-term goals (usually their child’s college education and retirement.) These mid-life investors frequently have a “balanced” portfolio, with a mix of conservative and riskier investments across varied investment classes. The portfolios of moderate investors are often fine-tuned or revised to become more conservative as they age. These investors are willing to accept some losses and risks and are pragmatic and usually educated about the realities of investing and their investment options. Some moderate investors are retired or nearly retired, having either retained their investment stance out of necessity (they need to continue accumulating assets in retirement) or out of preference (they do not want to “miss out” when the bulls run on Wall Street.)
We have questionnaires and in-depth discussions about risk tolerance. It is a very important factor, not only in terms of investing, but in terms of the client-advisor relationship. If you’d like to learn more about different investment styles or you feel you might be taking on too much risk as you invest, we urge you to give us a call today.
