Risk vs. Return: Running Pell-Mell or Stepping Carefully

While my two children share some characteristics, they are both very much individual and distinct people.   I’m always proud to watch them to think through issues and articulate their positions.  We have tried to teach them to be respectful whether they agree with someone or not.  If they do get into a debate, the use of facts and a calm voice will win the day.

When my son first started walking at about 11 months, it quickly became a run.  If he was on his feet, he’d turn it into a run.  When I got home from work, my wife asked me to tire him out.  I would dare him to catch me and off we would go.  Countless laps were run throughout the house.  I could not get him to slow down.  The words pell-mell come to my mind when I think of his approach to running.  The Cambridge Dictionary defines pell-mell as “very fast and not organized”.

That pell-mell approach resulted in countless falls.  He would just fly as fast as he could all the time.  It got to the point that he developed a bump on his forehead we feared would be permanent.  Luckily, he started to gain control of his body, though his tolerance of risk remains with him.

My daughter, on the other hand, began walking with extreme care.  She stepped wisely everywhere she went.  When she began running, it was very deliberate.  She almost never fell.  In fact, I can recall only a few instances where I had to pick her up and wipe her skinned knees.  She was that careful. 

Natalie continues her thoughtful and deliberate approach to things.  Even after playing sports for 10 years, I’ve only seen her fall a handful of times. 

There are a variety of factors that influence this behavior including DNA, birth order, environment and gender.  When it comes to investing, from my experience, gender seems to be the biggest determinant as to a willingness for risk. 

Before I raise any hackles, I want to state that this is purely my own observations over the course of my career.  Men tend to overestimate their investment selection abilities.  They are much more willing to take on risk with potential for significant loss.  It takes a few losses to teach a more cautious approach.

Women investors, on the other hand, are often more cautious with less willingness to take on risk.  Security and stability seem to be an utmost concern.  This point of view can leave needed returns on the table.  In other words,  this approach may result in your portfolio falling short of funding future goals.

Of course, these tendencies are not strictly confined to either gender.  I only raise them because of my own experience.  More men will run pell-mell, and women tend to step carefully.  Recognizing your personal investing tendencies will help you avoid making mistakes.  Too much risk may result in loss.  Too little risk may result in underperformance.

Individuals who invest on their own should take care to understand their own behavior profile.  Are you a risk-taker or a risk avoider? Knowing which one you are can help you avoid mistakes.

An advisor can help you navigate your behavior tendencies with a more unbiased approach to building a well-diversified portfolio.  That losing XYX stock you bought on your own has no emotional attachment for an advisor.  They can help you see your way to thinking more holistically about your portfolio. 

When it comes to couples, I would argue that an advisor is a critical component from a risk perspective.  If the spouse that takes the lead on investing is disabled, an advisor can help the less engaged spouse at a critical time.   Even if you entrust just a portion of your assets with an advisor, it can be a great method to mitigate the risk of having your spouse at loose ends.

If you would like to learn how an independent, fee only advisor can help you, please contact me.  Feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com