How much risk should I take?

The other week I was competing against another adviser for a new client. During negotiations, the new client (yes, he went with me) said to me “Mr broker says he can get me 8% growth per annum. What can you get me?”

I told him I didn’t know how he could make such promises because I certainly couldn’t. I have no control over how markets perform, what dividends were paid out or the individual stocks that a fund manager picks (or the stocks that make up an index if passive funds is your thing). What he would probably do is pick the fund of the month and next year tell you that fund isn’t so hot anymore and you need to switch to another fund that is much better…repeat until broke.

What I would do for him was go through my investment process with him to find out what he wanted to spend his money on and when. Once I had an idea of how much money he needed to do the things he wanted to do, I could give him proper investment advice on the level of risk that he needed to take with his money.

It turns out that this client only needed to maintain the real value of his money, so he doesn’t need to take much risk with his money at all. If he had gone with Mr 8%, he would have exposed himself to unnecessary risk and may ended up having to work that little bit longer and spending that little bit less time doing the things that he really wanted to do.