In my close to 20 years working with investors I have found gauging one’s risk tolerance is more art than science. There are models galore that will give you an “appropriate” allocation for your age, income needs etc. But often times that’s thrown out the window when times get tough. And tough they have gotten, for example, in the 2000 tech bust and the recent crisis in 2008. It’s amazing to me how quickly the rough times have been forgotten. In the good times, most investors feel they’re thick skinned and can handle the volatility in the market. That is until they start losing some serious money. You can forget about percentage points here and there. When a million dollar portfolio is off by $200,000, fear sets in, there’s a conversation with a spouse, and stocks are sold.
It’s with the above scenario in mind that I am writing to you today about the weekend column by the WSJ’s Jason Zweig, “The Intelligent Investor”. I usually agree with what Zweig has to say. We share the belief, for example, that one of the best books ever written on the subject of investing is Ben Graham’s, The Intelligent Investor. As I write to you my copy is within arms length. It was a gift to me by Dick Young over 15 years ago when I first joined his company so it has some meaning to me.
In his latest column, Zweig writes about a money management company that charges low fees but uses a computer algorithm to construct client portfolios. That may sound good on paper, especially during the good times. But what columnists like Mr. Zweig often fail to see is the day to day struggle of managing money while the bullets are flying overhead. It is hard. It’s emotional. And most investors realize that their risk tolerance is much, much lower than they initially thought it was. But that’s when a trusted advisor is worth his weight in gold. Because it’s the advisor that knows his client who is able to deliver when times are tough. That’s not speculation on my part. That’s how we’ve been able to win the war for our clients.