When I look back over the past twenty years (boy, I sound just like my parents), I see three major market downturns: In 2001, the stock market went down 48%. In 2008, it went down a whopping 59%. And as recently as 2020, it went down a mere (!) 35%. And here we are in 2021, with the stock market continuing to reach all-time highs. While I may not always be happy about it, markets go up and markets go down; that’s what markets do.
As I’ve gotten older, so have our clients, and our time frames and expectations continue to change over time. That’s just the natural progression of life. Wouldn’t it be ideal if you and I could get significant returns during every stage of our lives, year after year, without any downside/market risk? Just think: all the fun and none of the drawbacks when it comes to investing. Who wouldn’t love that?
Sigh. It’s a nice dream, but expecting markets not to experience cycles given our financial markets is simply unrealistic. Well, we may not live in a world without risk, but we can each decide what level of risk we consider acceptable for our accounts.
As an investment/wealth advisor, I needed a reliable way to determine the level of risk an investor is comfortable with for their investments. It seemed to me that investors fell naturally into one of three levels of risk tolerance. I came to think of these categories as Ferrari, Minivan, and School Bus.
Many of you have heard me use this analogy. (I have three Hot Wheels on my desk as my visual reminder.) Every time I mention these visual images, my right-hand man Mr. Lewis rolls his eyes. Yet I chuckle quietly to myself every time I hear him quoting me using my own analogy. It must be good if Mr. Lewis is using it! These categories are understandable and relatable no matter your financial background. Each immediately conjures a certain image, and each implies a level of risk that has nothing to do with how much money one has. Let’s take a look.
#1: The Ferrari
The first type of investor is the Ferrari. Just like all the other types, these investors seek big returns, and they are willing to accept the downside risk associated with those significant returns. That’s the biggest difference with this type of investor: they won’t lose sleep over the kinds of losses we experienced over the last twenty years.
In fact, very few individuals fall into this category. We may admire Ferraris from afar, but when it comes right down to it, not many of us can look that kind of risk in the face and keep our cool. If this isn’t the approach for you, you may fit into the next investment category.
#2: The Minivan
The second type of investor is the Minivan investor. They know they’ll arrive at their destination, but they don’t seek the level of risk that comes with driving a Ferrari to get there. Plus, the cost of owning a minivan is a lot lower—and if you crash a minivan, chances are good that you’ll survive.
This type of investor is the most common. It’s the “happy medium” intersection of risk and reward that most of us are comfortable with: steady growth and acceptable risk. (If you are wondering, most of the time, I’m in the minivan.) But if even this moderate risk feels like too much, you might identify with the third type of investor.
#3: The School Bus
The third type is the School Bus level of investor. We generally don’t hear about a school bus crashing. (When I was a kid, they didn’t even have seatbelts.) With a school bus, you know you’ll arrive at your destination eventually, and the thought of driving a Ferrari or Minivan just isn’t appealing.
This type of investor is the second most common: they are more concerned with holding on to what they have and most comfortable when they can minimize most of their risk, even if it means taking a little bit longer to get where they want to be.
Bonus #4: The Park Bench
I’ve learned in my old age that we have a fourth type of investor: the Park Bench. Some investors, in moments of extreme economic uncertainty, simply want their money to rest and be at ease. They know that it’s not best to let 100% of their resources sit idle for the long term, but there are times when they feel too uneasy about what’s happening in the markets to want to participate in them.
If you’re losing sleep at night over uncertainties and you’d rather sit and wait on the sidelines, at least for now, you may be a Park Bench investor.
What’s Your Investment Style?
As investors, you and I have invested our dollars in each of these four categories at some point. Yet the most significant factor in determining which type of investor you are is your percentage of allocation in stocks, bonds, and cash.
As you go through life, you may find yourself in one category today and a different one ten years from now. You may find yourself returning to the one you left ten years prior because an investment opportunity arose. That’s natural. That’s investing. That’s life.
Wherever the markets are in their cycle, whatever fluctuations our investment statements reflect, it’s important not to lose sight of our long-term investment strategies and our objectives for growing and protecting our resources.