Rock/ Paper/ Scissors
March 1, 2010
In helping people make decisions on investments, we often ask folks to tell us how much risk they’re comfortable taking. But can be a hard question to answer. It’s hard to describe “how much” risk is acceptable and “how much” is too much. And so our clients often say things like “I just don’t want to lose any money.” Or sometimes it’ll be something like “I can handle risk as long as it doesn’t go down too much.” But at other times, the question of risk just draws a blank stare.
One way that we can help people begin to quantify what we like to call their “risk tolerance” is to ask them the following question: On a scale of 1-10, with 1 being super conservative (absolutely guaranteed etc.) and 10 being way out there (They’ll be delivering pork bellies to your driveway soon.), where would you put yourself FOR THIS MONEY? It’s not a perfect way to get at this question, but it’s a start. From there we can refine things.
People answer this question in different ways. Sometimes it’s along the lines of “I’m somewhere in the middle – like a 6 or maybe a 4.” Occasionally, it’ll be a strong response like “I’m a 9!” But most folks are a bit vague in their answers. “Somewhere around a 5 perhaps.” And that helps us a great deal.
Recently though I posed this question to a woman who just looked at me with a wry smile.
“Are you kidding me??? On a scale of 1-10? Well honey, I’m a negative 2! No risk at all. Why when I was a kid, my dad liked to play rock/paper/scissors for pennies. No sir. I never played. I was hanging on to my pennies.”
No doubt the direction we needed to go with her money. Everything conservative, predictable, safe.
Now you can say what you like about needing to take a little risk sometimes if you want to make money in an investment and that’s true. But this was her money and she didn’t want to. And that’s what fascinated me so much about her. She knew herself very well. She knew what she wanted and what she didn’t want. She was fully aware of what would keep her up at night and what it took for a good night’s sleep. And in all of that, she was unusual.
How many of us really do know ourselves that well? How many of us are as willing as she to decide what exactly we need and want and then to live with the consequences? She sacrificed return for security, plain and simple. She understood that. The grass wasn’t greener on the other side for her. No the grass was just fine right where she stood.
Some people might criticize her, call her a scardy cat. I doubt that she would care. She knew what she needed – no risk. She knew what she wanted – security. She knew how to ask for it. GOOD FOR HER!
