This post is part 9 of our 10 part series on Financial Behavioral Insights from our Financial Planning Performance in the New Behavioral Economy White Paper. The financial behavior insights will help you gain greater self-awareness for recognizing some of your own behavioral tendencies and also those of investors.
Behavioral Insight 9: Risk-Taking Optimist
Mike Tudor is a 35-year-old entrepreneur who has been taking investment risks since he was 18 years old. He first learned from his father, who was always studying the stock market. For Mike it was natural to start dabbling in investment opportunities. However, Mike explained that he was very calculated in his approach, always ensuring that the perceived upside was more than the downside. He knows that at times he has taken what many would say are very bold risks, but he can live with the consequences when a loss is made. Mike admits he rationalizes losses as part of the game and gets on to the next opportunity.
Naturally daring and courageous people will be Risk Taking Optimists who are prepared to take opportunities but may take unnecessary risks at times.
Communication key: Present the risk and return of each investment.
Mike is a Risk-Taking Optimist who sees taking risks as an inherent part of life and investing money. These investors are naturally opportunistic and will be comfortable taking risks. They will also be comfortable living with the dangers of taking those risks. Their mind-set will be that the next opportunity is around the corner and not to worry about the past too much.
However, the struggle for Risk-Taking Optimists is that they can take too many speculative risks that leave them with more losses than wins. Their blind-spot is that they may not see the dangers and gamble too much against the odds.
Without a high level of self-awareness many investors think they are far more risk tolerant than what they really are. Often they are being driven by outside pressures and desires to make money or are simply ignorant about investment returns and how money is made. As soon as the market goes down severely, like in 2008, you soon see who has high risk tolerance. The problem becomes greater if the investor naturally has a significantly greater behavioral propensity to take risks beyond their risk tolerance capacity. Our research shows this is true in 20% of cases in terms of natural behavior. You can imagine the dangers of investors who leap at a profit-making opportunity when it comes up, yet when the loss is later made they are an emotional wreck because they do not have the tolerance.
An Advisor who is naturally a Risk-Taking Optimist will generally be comfortable in guiding their clients through the uncertain gyrations of financial markets, particularly if they know their clients have a higher risk tolerance. The risk is that they do not see the dangers and take the wrong chance without fully informing the client.
Risk-Taking Optimists need advisors to provide clients with boundaries to manage their propensity to take risks and provide a reality check on their tolerance for living with those risks. Ask the client: What courageous goal have you set? What safety nets do you need in your life?
What are your thoughts? For additional information on discovery through behavioral profiles, click here.