Financial Advisors are taught, in general, to determine a clients ‘Risk Tolerance’ by asking certain questions and then checking a box on the application that aligns with the client. Those options are typically, “Low, Moderate, High” with some steps in between. The conservative clients typically think the stock market is legalized gambling and fear it all going to zero. The ‘high’ risk clients are typically well experienced with the stock market, and/or have large sources of other income from pensions and/or real estate, so they don’t need to rely upon their investments for income, but have it as a backup.

One real life scenario that impacted my thoughts on risk in investing is a family that started with two trust accounts. We put $400,000 into a Moderate (60% stock market) allocation and $200,000 into a 100% stock portfolio. The idea being that they may use the less risky $400,000 account and they would leave the $200,000 alone for at least 5-10 years. What I found is that the 100% stock account has grown substantially better and is closing in on being equal with the Moderate account balance, even though we have had some recent rough stock market years.

Another very interesting scenario is a client who retired before age 60 and started a Substantially Equal Periodic Payment Plan or what is also known at 72(t) distributions. These are non-changeable for 5 years or until you turn 59 ½, whichever is later. He decided to use an 80% stock portfolio and has been doing that for six years now. He has more money than he had six years ago after distributions. Normally, an advisor would suggest a client be Moderate in that scenario, but he came out way better doing a majority of stock.

So in both of those examples, the clients made more by technically being ‘riskier’ in the stock market. One by leaving it alone and the other taking distributions. But were they really taking on more risk? This question led me to use Perplexity AI and pose the question, “Since 1960, what are the odds of making money in the S&P 500 over various time periods?”. The answer:

• A 5-year holding period has about a 75% chance of a positive return.
• A 10-year holding period increases your odds to around 89%.
• A 20-year holding period has resulted in a positive return in every case since 1960, implying a 100% chance in historical data for that time frame.

If I were to tell you that if you put your money into an investment for 10 years with an 89% chance of making money (more than likely substantial money), would you consider that risky? I personally would take that risk all day long. If you invest in the stock market for one year, it is basically a coin flip, but the longer you stay in, the higher your odds of success. And this is a simple example of just the S&P 500. You can add in other asset classes such as international stocks and small/mid size companies for added diversification.

So based upon my experience and the data, if I have a client saving for retirement and doesn’t have enough and they tell me they are a conservative investor, do I doom them into some low interest-bearing annuity or investment for safety that doesn’t achieve their goal or do I educate and suggest investing in the stock market is appropriate? I believe too many advisors do the former versus the latter. A financial advisor should look at a client’s overall situation and provide the best advice possible with the highest chance of success to achieve personal goals. If a client came to me and said they were conservative and never wanted to lose money and I ran their financial plan and it said they could not retire doing that with 100% certainty, then why should I not challenge them? In my opinion, an advisor should instead suggest they take an 89% chance of making money over 10 years and increase their odds of a successful retirement! If you are 60 years old and your life expectancy is 85, that is a 25-year time frame. That is plenty of time to ride out the ups and downs of the market. I would say that almost all of my retired clients maintain at least 60% in the stock market. And many have long term Roth IRA’s invested 80% in the stock market as they plan to use those last and most plan to leave the tax-free gift to the next generation, which means an even longer possible timeframe.

My personal conclusion is that age and fear shouldn’t be the major factor when it comes to how a professional advisor gives advice. A 90-year-old can have a 100% stock portfolio if the only goal is to transfer wealth to kids and grandkids and they don’t plan to use the money. If a client has a lack of knowledge about the stock market and wants to only be conservative, that can be mitigated by taking time to properly educate a client about the minimal risk involved in long term investing. All that really matters is taking a look holistically at a client’s situation and then taking time to coach and guide them on how to maximize their personal wealth not only for themselves, but for the next generation. A true advisor will not only listen carefully to a client, but advise them based upon experience and knowledge. As a fiduciary, that what a Wealth Manager should be hired to do!