The answer really depends on the source of the difference. Sometimes disagreements in investing strategy stem from a lack of understanding of how things work, so education could go a long way in helping people come to a joint decision.
If one party is particularly afraid of running out of money, that can be addressed by having buckets of investments for their various goals. If a person knows there’s enough money in the bank for emergencies – we recommend three to six months of living expenses – he or she will be more comfortable with fluctuating investments.
Have you and your significant other discussedwhatyou’re saving money for andwhenyou’ll need to access it? Funds that will be used to buy a new car in four years should not be invested for growth but concentrated more on preserving what has been accumulated (while earning interest on the balance).
How We Help Couples Handle Risk
Here at Financial Resources, we help clients identify their tolerance for risk by using a carefully designed risk profile questionnaire (Pocket Risk) — it lets us compare the scores of each partner to determine where they match up. We also talk through their answers to help them see their similarities and differences, and to identify any unrealistic expectations (sorry, but you can’t expect massive returns with no risk).
Once we’ve discussed the questionnaire, we move into the subject of “risk capacity,” which is how much you can afford to lose in a given time period without having to significantly curtail your lifestyle. Obviously, someone with a high net worth or a retiree living off a pension will have a greater ability to absorb loss than someone who relies on investments to pay bills.
Finally, we talk through each partner’s risk behavior. As you may recall, in the late 1990’s internet and technology related stocks appreciated dramatically. A combination of rapidly increasing stock prices, investor confidence that the companies would have increasing profits, speculation, and available venture capital created an environment where many investors over-looked important financial metrics such as the price-to-earnings ratio (P/E ratio) of the stocks. The price per share for some of these stocks was often 100 times their earnings (it is traditionally in the range of 14 to 16 times earnings per share). Yet, people were not only buying the shares thinking these companies were going to continue to appreciate, many were buying the stocks on margin, meaning they were borrowing the money to acquire them! So individuals not only saw losses in share price as the bubble burst in 2000, but also had to pay the brokerage company holding the stocks, interest on their accounts. Double ouch!
We’re able to help our clients manage their risk behavior effectively, because we’ve already identified their risk tolerance and their risk capacity, and have built a financial plan that will help them achieve their goals in light of both. We can prevent emotional, heat-of-the-moment decisions from inhibiting their progress, because we have built-in contingency plans for life’s random disruptions.
By addressing risk up front and making sure both partners are on the same investment strategy page, we can help ensure that our clients are well positioned to achieve their financial dreams.
Co-Authored by Roxanne Fleszar, CFP, ChFC & Barbara Ristow, CFP; Financial Resources Management Corp. is an independent affiliate of Pinnacle Advisory Group, Inc.