Early this year, my family took a trip to Disney World and Universal Studios in Florida. Both of these parks are wonderful places to spend time at because there is something for everyone. It does not matter if you’re a small child, a teen, or an adult, everyone can find things to enjoy. While we were there and discussing our itinerary I couldn’t help but notice how many of our experiences had parallels to the discussions I have with clients when it comes to investing.
The first discussion we had after buying our tickets was to create a game plan in relation to what things we were going to do each day. It was important to consider each person’s experience and look at what activities would fit their personality and needs best. This is where the conversation started to feel very familiar. Choosing each ride to go on is very similar to a conversation about investments. Let’s go deeper and look at several rides and how they relate to investment risk and reward.
In going on rides like a merry-go-round or tea cups, one could say that the risks are low. In taking a step up, there are small, but classic roller coasters like Space Mountain or the runaway train. My daughter at age 15 thought these rides were fun but my nephew at age 7 stepped off with wide eyes and a slightly panicked look. He stated he enjoyed them but also said he would not ride either again. To ramp up the excitement, one just needs to go over to Universal Studios where there are major roller coasters that would not only terrify a young child but also many adults.
Each of the above rides could be thought of as different portfolios, a conservative one, something middle of the road and then an aggressive portfolio with high risk. The difference, however, is that when it comes to amusement rides, most of us know what we are getting into long before we sit down and buckle up. For many of the rides, we can actually see the tracks and the people on it so we know how much excitement there is. If you just think of basic biology, we are wired with a fight or flight response. As we go through life our experience allow us to gain a keen sense of physical risks.
Portfolios, just as with amusement rides, can be seen differently depending on the perspective of the individual. Take the tea cups, I have seen grown adults come off those spinning and green. Those cute rides can be a nightmare for some. Risk is an individual thing and where one might see the potential upside, others will see only the downside and more scary parts. Because each of us has a unique perspective there really are no “one size fits all” investments. Even though many investment companies design products trying to fit everyone into the same box, it is not realistic and in turn people often have disappointing results.
When it comes to investing, the risks and rewards are not easily deciphered. There is no track ahead to look at and we are certainly not wired biologically to assess non-physical risks. The reason all this is so important is that getting on the correct investment “ride” to match ones risk is critical. In working with a skilled financial professional you would go through an assessment to gauge your risk. You would then have a conversation about the details of your particular risk level. The goal of your advisor should be to help you make an informed decision where you truly understand what ride you are on before you buckle up.