The part of me that longs to be a sociologist has been thinking a lot about how people view risk in general, and if people with conservative career positions also invest conservatively. In my practice I see many people who have steady-freddy jobs and also take very little risk with their investments (they whisper over my desk–as if in confession: “I’m really conservative“). I’ve come to realize that most people are generally not comfortable with risk. I know, not a shocker.
I just found out I have to have a tooth pulled. I was very melancholy until my intern told me about a friend whose wife died in her sleep last night.
Life is risk, life is uncertainty. So, we devise all kinds of strategies for dealing with life’s uncertainties such as asset allocation, dental floss and life insurance.
So who is comfortable with risk?
Entrepreneurs, that’s who. And they often feel they’re taking so much risk with their businesses that they don’t want to take risk with their investments.
The sweet spot, it seems, is someone who is paid well and regularly who can afford to take risks, and that is a limited pool of people.
Have you seen the video Divers almost end up in mouths of large whales? (Warning, some foul language – understandably – is used.) Now, surely the divers knew they were taking a certain amount of risk, but they went diving anyway. I’m sure there are people who watched this video and thought, “How stupid could these divers be?!” and I think that’s why some of us prefer to avoid risk: because we don’t want to be on the losing end of a risk and for people to think we’re stupid.
I have read many articles in the Journal of Financial Planning and elsewhere indicating that financial planners should consider a client’s career as an asset class (like “stocks, bonds, cash and career”) to derive a more accurate level of risk in a person’s financial life, not just their balance sheet.
For example, if someone has a predictable, steady income from a predictable, steady job, then that person could reasonably take more risk in his or her investment portfolio. Alternatively, if someone’s career offered income that had little certainty but, rather, behaved more like a stock with peaks and valleys, his or her investments should be more conservative.
One such article was written by the amazing Michael Kitces, CFP® ; a veritable financial planning superhero Do You Show Human Capital On The Balance Sheet?. The article prompts the financial planner to consider the value of one’s career and career income in the overall planning process. This is huge because nothing (other than winning the lottery or receiving an inheritance, neither of which is within your control) will affect your financial situation more than your career. Another fellow planner (and no less a superhero) Michael Haubrich, CFP®, wrote Career Asset Management: Where Wealth Is Created for the Journal of Financial Planning. Both cause me to ponder this issue further.
The thing that hit home in both of these articles was the possibility of being underpaid and the long term effects of that. Being a woman and former president of our local chapter of NYS Women, Inc., I am keenly aware of the salary discrepancies between men and women (a tangent clearly for another day). But there it was. And women are notorious in the investment community for being low risk (risk is sexy, but not feminine). Blogger Doug Sudheim poses the question and learns some surprising answers in his post Do Women Take As Many Risks As Men?
So what do risk and gender mean in our lives, our careers and our finances?
Photo by Paul Lauber