If you’ve worked with a financial advisor before, one of the typical exercises is to fill out a multiple-choice questionnaire designed to assess your risk tolerance. The purpose of the assessment is so that the advisor can decide how much potential pain you can tolerate in your investments should the market decline. Some call it the “sleep at night” factor – if your investment strategy is so risky that it keeps you up at night, that’s too much risk.
This is all well and good. Financial advisors should be able to help you understand the concept of risk and how it plays into every aspect of your finances, including your investments. The problem, however, lies in the fact that investing and markets are inherently uncertain and no assessment of your tolerance for risk can predict what kind of pain the markets may inflict upon you or how you will react.
That’s why it is so hard to tie what is known as asset allocation – the decision on how your funds will be divided in different types of investments such as stocks, bonds, cash, real estate and alternatives – to a multiple choice risk tolerance questionnaire. The fact is that every kind of investment has its risks, including:
- Stocks: can and have declined as much as 45 percent one year within the past five years
- Bonds: can lose value as interest rates increase and can also offer extremely low returns that won’t even compensate for inflation
- Cash: loses real value every year because of inflation
- Real estate: suffers from boom and bust cycles and isn’t easy to sell in an emergency
- Alternatives: are hard to understand, difficult to sell in an emergency and can lose a lot of value in a short period of time
So what can you, as an independent woman, do in the face of all this risk? You can’t control it, that’s for sure. There is no way for anyone to know, even the savviest financial advisor or investment manager, what the markets will do at any given moment. But that doesn’t mean that you don’t have any control at all.
You do have control over the wealth goals you select and the financial advisor you choose to help you realize those goals. As a financial advisor who works with independent women and believes in and practices true wealth management, it’s my job to help you discern your goals, figure out where you are financially in relation to those goals and help you devise a plan to get there.
Obviously, any sound financial and investment plan will take into account the risks inherent in investing in stocks, bonds, and other investments. But at Wealthcare for Women, I don’t let what the market might or might not do dictate an investment and financial plan. Rather, I work with my clients to help them determine their goals, formulate a plan that works for them and execute that plan, making adjustments as we go through regular planning reviews every 90 days. That’s the job of an intelligent and caring wealth manager.