It’s true that opposites sometimes attract. But what do you do when you and your significant other are opposites when it comes to investment strategy? You might be an aggressive, pedal-to-the-metal investor, while your partner is more financially conservative. (Or vice versa.) A difference like that can be a huge obstacle to developing a sound financial plan.
So what can you do?
The answer really depends on the source of the difference. Sometimes disagreements in investing strategy stem from a lack of understanding of how things work, so education could go a long way in helping people come to a joint decision.
If one party is particularly afraid of running out of money, that can be addressed by having buckets of investments for their various goals. If a person knows there’s enough money in the bank for emergencies – we recommend three to six months of living expenses – he or she will be more comfortable with fluctuating investments.
Have you and your significant other discussed what you’re saving money for and when you’ll need to access it? Funds that will be used to buy a new car in four years should not be invested for growth but concentrated more on preserving what has been accumulated (while earning interest on the balance).
How We Help Couples Handle Risk
Here at Pinnacle, we help clients identify their tolerance for risk by using a carefully designed risk profile questionnaire (FinaMetrica Pro) — it lets us compare the scores of each partner to determine where they match up. We also talk through their answers to help them see their similarities and differences, and to identify any unrealistic expectations (sorry, but you can’t expect massive returns with no risk).
Once we’ve discussed the questionnaire, we move into the subject of “risk capacity,” which is how much you can afford to lose in a given time period without having to significantly curtail your lifestyle. Obviously, someone with a high net worth or a retiree living off a pension will have a greater ability to absorb loss than someone who relies on investments to pay bills.
Finally, we talk through each partner’s risk behavior. For example, during the housing boom everyone wanted to flip houses. People were buying rental properties with 100% financing and interest-only loans, without worrying about the debt. After all, they thought, the rental income would cover the interest-only mortgage payment and the appreciation on the house would allow them to sell the property in three to five years and make a killing. Does that sound familiar?
We’re able to help our clients manage their risk behavior effectively, because we’ve already identified their risk tolerance and their risk capacity, and have built a financial plan that will help them achieve their goals in light of both. We can prevent heat-of-the-moment decisions from inhibiting their progress, because we have built-in contingency plans for life’s random disruptions.
By addressing risk up front and making sure both partners are on the same investment strategy page, we can help ensure that our clients are well positioned to achieve their financial dreams.
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