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Thanksgiving and Risk Tolerance

The human body is not grateful for a lack of pain. Most of us don’t get out of bed everyday thankful that our knee, back, ankle or ribs don’t hurt. It is only when an injury is present, when we are not at our best, that we recognize how much we accomplish in a given day of health and how severely our limitations can be reduced. This point was driven home for me recently when I severely pulled an abdominal muscle and went from being disappointed I didn’t run my five mile workout faster to taking five minutes to roll over onto my stomach in order to slide out of bed without pain.

We have all been injured or had to come back from a surgery or procedure at some point. As we move from being very limited to getting back up to speed, we recognize and are grateful for the small things – being able to bend over and pick up a dropped pen, being able to carry a plate to the dinner table and so on. But shortly after we regain function, we quickly lose sight of how many things we take for granted every day. This is built into our DNA, the way we are “wired,” in conjunction with the healing process. If it wasn’t this way, once injured we may never venture back into whatever hurt us in the first place, each family would have only one child and our lives would be less rich. This concept is applicable to many of life’s injuries be them physical, mental or emotional.

I have two seemingly unrelated thoughts related to this concept. First, given Thanksgiving is once again upon us, focusing on gratitude will help live a better life. The financial planning tie in is how this concept relates to the ineffectiveness of the “risk tolerance” questionnaire and the suitability standard of care that much of the financial services industry is allowed to operate by. These are two wide ranging topics, but bear with me.

The gratitude aspect is simple. Many of us spend our days focused on “if things could have only been……” rather than on “……….. really went well today.” First to mind for those of us that compete in athletics is our disappointment for not having run a little faster or gone a little farther in comparing a performance to our absolute potential. Despite how we are wired, this is a recipe for disappointment. Research shows that a change of mindset (adjustment of perspective) can be had with appropriate attention, perseverance and repetition. Just like building muscle in the gym to turn that gut into a six pack you can actively alter your perspective to one of gratitude. For example rather than comparing yourself to your absolute best, what if you thought back to the recovery day when you were unable to get up off the couch or do something as simple as walk out to get the mail? Then when comparing a race time that is just less than a personal best to your fragile limitations you can see just how amazing even finishing that race was. This is not to say we shouldn’t push ourselves, rather we should not dwell on perceived shortcomings. To wrap up the first point, simply recognizing and being grateful when you are well, and when the little things go as planned, will result in living a more satisfied life.

Gratitude is certainly applicable in planning as well, but a more direct planning connection is the ineffectiveness of traditional “risk tolerance” questionnaires and the inherent deficiencies of the “suitability” standard.

Much like we don’t remember the pain of an injury after it has healed, most of us don’t remember the panic feeling of seeing our portfolio drop in the last great “Chicken Little” (The Sky is Falling) moment in the markets. Even if we had perfect recollection, that moment is likely so long ago that our situation has changed such that our reaction the next time would be totally different than the last time. The problem with investing by risk tolerance is the only way to know what your risk tolerance is in a given moment is to experience THAT moment. And making decisions in moments of panic is a recipe for disaster when it comes to your financial life. Similarly the Suitability Standard of Care that Broker Dealers and Insurance Salesman (who sometimes go by Financial Advisors) are held to is flawed because it relies heavily on a person’s risk tolerance score. Even worse, it also states that the broker or salesman is NOT required to focus on what is in the client’s absolute best interest (like the Fiduciary standard that we in the Registered Investment Advisory community are held to) but rather their advice need only be suitable for the client’s situation based on age and perceived risk tolerance. It seems to make sense to anyone who doesn’t have a player on the suitability team that the uniform standard of care for anyone handling another person’s money should be to put the owner’s interest ahead of their own, yet the suitability standard remains prevalent.

In conclusion, with the Thanksgiving holiday upon us, make a conscious effort to focus on gratitude. When working with a financial advisor, don’t put much stock in traditional risk tolerance devices to guide your investment process and make sure that advisor is held to the Fiduciary Standard.

Happy Thanksgiving from Active Lifestyle Financial Planning

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