My philosophy: I work hard so I can play hard. I own or have owned fun, adventure machinery like ski chalets, boats, motorcycles, and more. Whenever I was in the market for something new, the most impressive sales presentations were the ones that told me the “bad news” up front. “Now Gary,” the good salespeople would tell me, “owning a piece of machinery like this will have some ongoing costs to keep everything running properly. Whenever you need it serviced, it will cost you some extra funds.” Whenever I heard this, I felt I w as dealing with a salesperson invested in my enjoyment. They let me know all the costs that were going into whatever I was purchasing.
This same method can be used when meeting with clients. When I sit down with a client, I let them know the negative facts and information about every suggested investment. By the end of the meeting, they know that whenever the red marker comes out, I’m going to tell them something bad about that investment.
When a new client learns they can potentially lose all of their funds as they are currently placed, they all ask, “How can I get a reasonable return without maximum risk?” Understanding their risk capacity is the answer. Couples confuse their risk capacity with their risk tolerance, which is the stress of a portfolio's movement. Risk capacity is the amount of any investment you could afford to lose and still maintain your lifestyle. If you think you can’t afford to lose any money, you need to have a conversation with your financial advisor if you own risk assets.
The same philosophy holds true with income capacity. You should never regret a financial decision because you weren’t educated on both the good and bad aspects of an investment. You have to take time to ask questions and not just wonder what you will receive in retirement income. Know your income capacity, the amount of income that could be lost due to unforeseen circumstances. For example, if you would need to maintain your current lifestyle while being able to meet the immediate cash flow needs of long-term care, your income capacity should be quantitatively measured. Your advisor should sit down with you and plan for both the unexpected and expected. Once you have a plan in place for your risk and income capacities, you can be prepared for the negatives. When you know your income, risk capacity and market declines, it will let you know where your portfolio should be and if you are on track.
Once you understand the bad, the good aspects of your portfolio will sell themselves. When you have that conversation with yourself and your financial advisor, you will sleep easier knowing how you can rid some of your risk components. Once you understand the negatives of your investments, it will make the good ones shine without any salesmanship.