Just as there is no one size fits all, there is no one investment that is suited for all people. As financial professionals, we must assess each individual client’s time frame and risk tolerance to understand if an investment is appropriate for his or her portfolio. Clients should keep this in mind before buying the “hot new stock” their neighbor is talking about or that they see on TV. Your neighbor’s financial situation may be completely different than yours, perhaps making that investment a good fit for him and an inappropriate fit for you.
Determining the “suitability” of an investment for a particular client isn’t solely ascertained by the client’s age or net worth. In fact, the same investment might be appropriate for a 30-year-old and for a 65-year-old but may not be appropriate for two different 65-year-olds. For example, consider two hypothetical 65-year-old clients. They are the same age and have the same net worth. The difference is one is working, and the other is retired. The retired client is taking money out of his retirement accounts while the working client’s account is still growing with salary deferral contributions. This variation in account distribution time frames creates very different scenarios for these two clients.
Understanding a person’s risk tolerance is another big consideration. Risk tolerance is defined as a person’s ability and willingness to stomach a decline in the value of their investments.¹ We often see disparities in risk tolerance between couples. One spouse may be footloose and carefree with their investments and corresponding performance while the other spouse may be fearful of market volatility. That is why when we meet with clients, we ask many probing questions. It can sometimes feel like going to the doctor. We routinely ask clients what has changed in their lives, what are their financial goals, do they need to take money out of their investment accounts, and the list goes on. It’s not that we are nosey; we just need to better understand the client’s perspective and current situation. The answers to our questions help guide us to make investment decisions that are the most appropriate for that particular client.
So, before you buy the stock that is trending on social media for its great performance, stop to consider if it’s really a great buy for you. If you’re not sure, working with a financial professional might be a good next step. Advisors can help keep you on track with appropriate investments for your portfolio and overall financial goals. At Hovis & Associates, our financial professionals can help you assess your situation and recommend suitable investments. Call us to schedule a meeting to see how we can help.
¹ https://www.bankrate.com/investing/what-is-risk-tolerance/