TRY TO AVOID THE ‘R’ WORD

Language is powerful. Kristen Lindquist, Associate Professor of Psychology and Neuroscience at the University of North Carolina, said it best: “Language can be no more removed from emotion than flour can be removed from an already baked cake”.

That’s why we need to take heed when addressing the issue of risk in the investment environment. The word has negative connotations and creates unease when used inconsiderately.

What makes it even more dangerous is that there are so many different interpretations. The following phrases can all refer to “risk” in an investment context: capital loss, short-term volatility, not reaching an investment objective … the list goes on. Should we not focus on describing the issue at hand, instead of describing everything as “risk”?

Take this catchy old cliché: “Your biggest risk is not including enough risk in your portfolio”. (Yes, I know the seasoned investors are grimacing.) It’s a simplistic statement, but it’s also a good summary of the dilemma we face when dealing with the concept of risk, and it speaks to the importance of embracing plain language when dealing with financial planning issues.

Many investors are knowledgeable, and information is easy to obtain online, but your financial adviser still has an important role to play – deciphering the jargon and unpacking concepts in a way that makes sense. If yours isn’t speaking your language, it might be time to look for a new one.

With my clients, I always take a balanced approach when dealing with risk tolerance. I use questionnaire tools to deepen our relationship and to help my clients gain a better understanding of money behaviour; then I use that information to emphasise the importance of placing investment goals ahead of emotion.

Risk is not a bad thing or something to be afraid of, and it also means different things in different contexts. By interrogating your relationship with the subject, you can prevent yourself from acting rashly and make the right decisions for long-term, stable growth.

Hester van der Merwe is a Certified Financial Planner at Ultima Financial Planners and the Financial Planner of the Year 2020.