Conservative Or Aggressive Investment – How Should Retired Investors Proceed?

I believe there are two main reasons why investors quit:

A prolonged plunge in the value of the account that is greater than the investor can handle, can cause an investor to quit.

At some point the investor is going to start getting nervous. If the account continues to go down further, chances are, that nervousness will turn into panic. For instance, an investor that is very conservative might start getting nervous if the account drops 3-4%.

A more aggressive investor may start getting nervous when the account drops 10%. If the account is allowed to decline beyond these levels, the investor is going to have a hard time sticking with the program. Prolonged plunges in the account value of an investor can constitute a major investment scare.

The second reason that someone may quit is because they can’t stand volatility.

Financial markets usually experience seasons of calm and at other times they are turbulent. Volatility is when the account gyrates back and forth in a roller coaster type pattern. It may be a few percentages up one month, and the next month, it is a couple of percentages down. For instance, in 2011, we saw the market gyrate back and forth in a 7.5% range between January and July.  Then it plunged about 20% and then gyrated up and down in a 15% range. In the same way an investor may become nervously afraid after a prolonged plunge, trying to endure a sideways market gyrating up and down can be very nerve wrecking and will no doubt cause some investors to quit.

Each person has their own point at which they change from being uncomfortable to being scared. We all do. But in order for you to enjoy the fruits of investments, you have to find the right way to stay in the game. That’s why the type of wealth management strategy that is employed in the daily management of your money is so important. 

I believe so many investors using the typical Wall Street System advisor sometimes become so frustrated because their advisor gives them the impression that to be uncomfortable about an investment program will suggest that something is wrong with the investor!   

I take another approach to how these things should be perceived and addressed, and I also present a different philosophy on who to blame.

As a financial planner and private wealth manager, I believe you should be able to take the blame for an investor that quits. It should be your fault if the client gives up and quits or if they aren’t able to stay long in the game. As wealth management strategists, we should take responsibility because we didn’t correctly understand the investor’s limits.

But supposing that the investor is not quitting and wants to continue in the game, how do you keep him comfortably through the different financial market cycles? The key in my opinion is to manage the investor’s account in a way that prevents prolonged plunges and the sideways market up and down gyrations from happening in the first place. If the portfolio manager can keep the investor’s account within his or her comfort zone during those periods of market distress, then psychologically the investor will be ready to participate when times are good.

As a private wealth manager, I have found it important to  monitor my clients accounts closely and adjust the amount that is invested in the market, what it is invested in and EVEN WHEN IT SHOULDN’T BE INVESTED IN THE MARKETS. I do this on purpose, so that my clients can stay in their comfort zones and they can continue to stay in the game. If my clients trust that I am monitoring their accounts closely and staying on top of things, they can sleep well even when the market is crashing because they will know that their money isn’t.

You may have other questions for instance such as, what if the market goes up and we aren’t invested? Or, what if we miss a big run and lose all those gains? These are great questions, and ones which have unfortunately been systematically used by the WSS financial planners to hold investors prey!  It is the fear of missing a big run that the traditional WSS advisor uses to try to sell you on buy, hold and suffer.

But things don’t have to be this way!

To find out why, watch out for my next article titled The Investment Climate for 2012 – What the Retired Investor Needs To Know in which I will discuss examples of why no investor should allow themselves to be drawn away out of fear of missing the big run. 

About The Author

^{Jeff Voudrie is a Certified Financial Planner and nationally recognized financial advisor. Jeff has been in the financial industry for twenty-five years, and has been interviewed by The Wall Street Journal, CBS Marketwatch, Kiplinger's, The London Financial Times, The Christian Science Monitor, CFO.com and Financial Planning Magazine. For more information on Jeff, please visit: www.jeffvoudrie.com or www.commonsenseadvisors.com}