In Manhattan, pedestrians are statistically safer from fatalities when jaywalking than when using crosswalks. One theory: at crosswalks, people assume they’re secure, whereas jaywalkers look both ways to reduce the chance of being hit.
Playing it safe poses unforeseen dangers in finances, too. Conservative investments aren’t always safe, or are so safe they provide little return.
Use these five strategies to help clients get comfortable with calculated risks.
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Show the risks
Cautious clients are often at risk of only protecting their capital, not their purchasing power, says Ross Turnbull, portfolio manager at Odlum Brown Ltd. in Vancouver. For instance, taxes and inflation can eat away at the supposed safe returns of long-term bonds.
One way to protect against inflation is by including dividend-paying shares of solid companies in portfolios.
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Look way ahead
Investors who play it safe often hit a wall, says Michael Nairne, president of Tacita Capital in Toronto. Consider someone highly weighted in fixed income, who projects living on 7% of her capital annually.
Depending on returns, spending, taxes, cost of living, and other factors, what’s the risk that she’ll run out of money? Nairne work through a variety of future scenarios and explains the chances of capital erosion to the client based on her life expectancy. He then explains how a more aggressive risk/return approach can alter potential outcomes.
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Put clients at ease
To calm nervous clients, educate them on what they own (or could own) and how it should perform for them in tough markets.
Turnbull has clients in Colgate-Palmolive. In 2008, he would tell them, “The company sells toothpaste. It has weathered past recessions and will weather this one. But, if you stop brushing your teeth, call me and we’ll sell it.”
Understanding the fundamentals of an investment naturally breeds more confidence.
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Clarify trade-offs
Sacrificing potential growth for safety has trade-offs. Nairne quantifies them. If clients are underperforming due to an overly conservative portfolio, he’ll raise the prospect of delaying retirement by a few years to accumulate more income, selling an asset like the cottage to turn it into cash, or spending less during retirement. He explains that safety has a price—and lets clients decide if they’ll pay it.
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Put the worst-case scenario in perspective
Dwelling on the worst case—which often isn’t nearly as bad as anticipated— is often what prevents people from taking risks. What if you quit your job to start a business and it fails? More than likely, you’d find another job.
Nairne examines how different asset mixes perform during reasonable worst-case periods. The recent recession, for one, is a great stress test. “People just don’t want to lose all their money,” says Nairne. “Most will accept more risk than they thought.”