Who Wants Risk?

When I opened my email this morning, I saw the following subject line: “Hartford Financial Services Group announced that they are exiting the Variable Annuity business.”  Last year, Genworth Financial eliminated their Variable Annuity product offerings.  And earlier this year, Allianz Financial announced that existing clients would not be able to contribute any more funds to their existing Variable Annuities.  Why are companies so worried about their Variable Annuity line of business?  Because the risk of the market has, in effect, been transferred to them!

Wikipedia defines risk as is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome).  In the realm of investments, people want to assume the minimum potential of loss while enjoying the greatest level of returns given their accepted level of risk.

Defining risk tolerance is not as easy as it may seem.  When the market (or a chosen investment) is trending up through a nice period of growth, people typically feel good about their investment and don’t have second thoughts about the risk of their investment at the time.  However, when the market trends down (even for a very short period of time), people start to feel like they are losing precious money—and that hurt/pain more than counters any pleasure derived from an equal amount of growth!

Years of psychological tests in investments, gambling, and thrill seeking have shown that the pain from an equal amount of loss compared to the pleasure/satisfaction of an equal amount of gain, do not equal each other.  In other words, human nature mandates that we have our cake, and eat it too.

Since the market has been trending up for the past 3-years (happy 3rd anniversary March 9, 2009!), I haven’t had too many people call to complain about their accounts increasing in value.  However, if and when the market starts to correct itself as it has done ever since “the market” came into existence, I can assure you that phone calls and emails will start to roll in.

If you think or feel that you might be a little more conservative than your portfolio mix might reflect, give my office a call.  I will explain the upside and downside to changing your investment risk tolerance, and we can discuss what ‘proactive’ measures we can take in attempting to soften the impact of a market correction.  I love talking investments….and my doors are open for discussion!