How Much Risk CAN You Take?

Transcript

Mike:

Welcome to another episode of Mike on money. I’m your host, Michael Reese certified financial planner

Mike:

Founder of Centennial Advisors, and of course, creator of the prosperity planning system. All right, today, we are going to ask and answer the question. How much risk can you take when it comes to your investing? This is going to be a really interesting look at the question of risk. I know you’re going to like it. All right. Before we dive in as always every week, what do I say? Click the like button before below. If you like this, click the light know little thumbs up one. Right? Make sure you subscribe, leave comments. If you’d like, if you want to talk to us, there’s links below and make sure you share this with your friends and family neighbors and you know, everybody else out there. All right. Let’s act, let’s ask the question and answer it. How much risk can you take when it comes to your investing?

Mike:

So the reason I’ve got this laid out this way is because the word can, can is really an acronym. I think that’s the right word. I’ll have to check it later. Anyway. It’s where each letter stands for something, Luke, is that an accurate? Okay. My camera man says I have officially used the word acronym in the sentence correctly. All right. The first letter C what does that stand for? That stands for capacity. So let’s imagine that you go talk to a financial advisor. No, no. You talk to 10 financial advisors out there and you go to all these big firms. You’ll you know the name on the door because you, you know, it’s like, Hey, I know, I know who these people are. I know you know who Wells Fargo is and Merrill Lynch and Edward Jones. So you go visit, you include all those places in your group of 10 advisors.

Mike:

And when you talk to those advisors, probably eight of them, or even nine of them before they invest your money, they’re going to ask you to fill out something called an R P Q, which stands for risk profile questionnaire. So if you’ve ever talked to on these people, these guys, these gals, you know what I’m talking about, right? It is you know, they ask you questions like Hey, what’s your time horizon, your investment time horizon. You know, when the market goes south, are you more likely to buy more stock sell stock, or just hold on? You know, here’s four or five portfolios, you know, that have increasing amounts of risk, which one feels like you. These are all risk profile questions. And bill reason that these companies ask this, there’s only one reason that they want. I mean, look, they’re going to give you if you said, Hey, why do you want this information?

Mike:

Why are you asking these questions? They’re going to give you reasons. But at the end of the day, there’s only one reason that they’re asking for that. And it’s because they, you have to understand this, the big brokerage firms, they make money on risk. The more risk you take, the more money they make on your account, they make money taking risk. And so what that questionnaire does is it tells them here is the maximum amount of risk that they can take with your money without losing a court case when you Sue them for losing too much money. So if it’s 2008 and you’re down 40% and you’re mad at them, so you say, that’s it. I’m going to Sue you. You took too much risk with my money. They’re going to whip out that document. You know, they go to court to whip out that document and say, oh no, no, look, yo Joe and Mary law, they signed off.

Mike:

They took this questionnaire. We just did what they asked us to do. See they don’t take on any risk. The minute you do one of these, you have absolve them of any responsibility, really when it comes to your money. But anyway, here’s what often happens. Let’s say that you score out as a kind of middle of the road investor. You’re a moderate. You’re either a you on a scale of one to 10. One means you’re super conservative. And 10 means you’re super aggressive. You’re like a five or a six, right? Let’s say, that’s how you score. This might surprise you. If you score is kind of somewhere in the middle, that risk profile questionnaire says to that company. You know what? This person, they are comfortable losing about 35% of their money in a 12 month period that they can handle that. Now I know what you’re thinking.

Mike:

You’re thinking what if I’m like a five or a, that sounds like an eight or a nine to me now. That’s about what the financial industry categories categorize as a five or six, like a balanced investor can lose 35% of their money in a single year. They did in 2008. So, Ooh, you got that going on. That’s a seat. Now, the next one, a what does that stand for? A stands for attitude? Well, what does attitude mean? Well, how about this? What if I asked you? So imagine that you are a five or six you’re on a risk, one super conservative, 10 super aggressive, five or six. You’re kind of in the middle. And I say to you, okay, you’re kind of call yourself moderate. Like you’re, you’re not conservative. You’re not aggressive. You’re kind of in the middle moderate. Tell me this. How much imagine you gave me your money, how much?

Mike:

And it’s a really bad year in the market. And you start seeing your account going down. How far down does it go before you’re calling me on the phone saying, Mike, I am freaking out right here, buddy. I’m going nuts. I, this account’s going too far. I, I, we gotta make some changes. Like how far does it go down before you start calling me and start getting worried? Well, most people who are in the middle, they would say maybe 15. So what does that mean? You got a million dollars. You might have more or less. It’s just to make the math easy. A risk profile questionnaire says on a million dollars, you can lose 350 grand in a single year, but you’re sitting there saying no, no, no, I’m in the middle. Like maybe 150. It starts to go more net. I’m starting to freak out.

Mike:

Right. That’s I get that a lot. So let’s imagine that’s the case. All right. Here’s the question, right? Which of these numbers is more important to you? The, the amount of loss that the financial industry says, you should be able, you know, they’re like, Hey, we did a risk profile questionnaire. You should be okay. Losing 35%. Is that more important to you? Or is it more important to you that you say no, no, no. Internally, if I lose more than 15, I’m going to go crazy. Obviously the answer is what you think. Thank what you think about your money. You is more important than that. I don’t care what the financial industry thinks. I only care about what you think. It’s not the financial industry’s money. It is your money. How am I doing? Does that make sense? All right. And you’re saying, oh my, that tracks, I get it.

Mike:

I shouldn’t take that much risk. I should take this much risk, ah, getting closer. But, but wait a minute, we have one more time letter here. We have one more letter weaving in. What does that stand for? That stands for the word need. You see, as a fiduciary, come at this a little differently. See when we we’re, we’re financial planners, we’re planners. And so my job, like if you came to talk to me, if I were your financial advisor, my I’m going to say, all right, here’s your situation. Let’s lay it out. And then we need to implement strategies, right? To help you make that, make that work for you. But here’s the question I’m going to ask. I’m going to ask this question. How much risk do you need to take in order to make all your financial goals? Reality? What if it was 5%?

Mike:

What if, when running the math, I was able to tell you luck. You know, you are, that’s too aggressive. You don’t need to take on that much risk. You can make all your dreams, all your financial goals, reality, and a bad year would be a 5% loss. Now you might not make 10% a year. Like you might up here on top, you know, average over time, you might make only seven, but maybe you don’t need to make 10% a year, maybe 7% of years. Plenty. Right? So as a fiduciary, I’m going to come from the bottom up. See the financial industry is trained. All the big firms are trained to take a top down approach. They start up here and they hope they never have to leave it. Right. It’s outworks. Whereas fiduciaries, you know, true fiduciaries. We’re not often asking you a risk rack.

Mike:

We do not often take you through a risk profile questionnaire because that’s kind of like junk information to us. If I’m asking you to fill out a risk profile questionnaire, you know why I’m doing it? Not because I’m going to use it, but because it makes regulators happy. So when I’m audited, when the sec comes in and they say, Hey, Mike you know, what’s, I’m sure you did a risk profile questionnaire on this person. What’s it say? And have you invested in a manner that makes sense? You know, I great. Maybe I’ll do it for regulators. I won’t do it for you though, because in my view, that’s like, why bother? You’re wasting time. That’s just a measurement to determine the maximum amount of risk you should take. I don’t care about maximum risk. I care about the bottom up. What’s the smallest amount of risk that you need to take to make all your goals and dreams.

Mike:

Reality. If I could make this number zero, if I could say, look, you can invest your money where you never ever lose a dime and you you’re, you’re still gonna make all your dreams happen. That’s going to be my recommendation now in today’s all interest rate environment. Do you think we can get away with that? Wow. Almost never. Right? Almost never. But that’s the point. Start with, need the N not with the C. So how much risk can you take? Financial industry says this. You say that fiduciaries. They focus on the bottom. Hope that helps. All right. That’s the end of this episode. If you liked it, put the little thumbs up button below, leave comments. You can contact us below. If you want subscribe, share with your friends and family. And remember what’s our job help you make those smart choices so you can enjoy a truly prosperous financial life. That’s this week’s episode. See you again. Next time.

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