Baby Boomer Guilty as Charged of being Highly Risk Averse

There, I’ve admitted it – I’m guilty as charged. As a Baby Boomer I am highly risk averse. The truth is I was risk averse before I was classified as a Baby Boomer too. I’ve always been that way. But there seems to be some stigma attached to it. It is as if I am sub-human because I don’t want to take unnecessary risks with my retirement nest egg.

Making me feel guilty because I don’t want to put a large percentage of my nest egg into risk-based assets and hold on, is one of they ways the wealth management industry tries to get me to do just that.

My wife says I’m too quick to sell. But wasn’t it Rothschild who said when asked how he made his fortune, he always bought too late and sold too early. I’d say that is the trait of a risk averse person like me.

We’ve all read plenty of news copy, written mostly by the wealth management industry, that we need to have anywhere from 30% to 70% of our money in risky equities in retirement, or we won’t have enough money to live on for the next 30 years. How do they know? For 16 years until the 80’s the market went sideways at best and inflation was high but stocks did not compensate for it then.

In 2000-2003 Baby Boomers who retired and who believed that bumbo-jumbo lost up to 40% of their retirement nest egg. It took until 2007 to get their capital back and now they have just been whacked again.

The financial guys will tell you that if you have a diversified portfolio this will protect you from losing large amounts of money. But their version of a diversified portfolio only includes for the most part different mutual funds which they control and charge high fees to administer. A painting or an antique really doesn’t give them on-going fees, unless they can charge you for hanging it on your wall and coming back every month to dust it. I might actually be happy to pay them for it too.

Right now Domestic stocks are down, International Stocks are down, Property is down, fixed interest is down. Where’s the diversification in that? I’d say there is some correlation there right now, wouldn’t you?

Risk Averse does not mean I don’t take risks. I just try to chose my risks and the right time to take those risks. When I do I also try to protect myself with an exit strategy or a backup plan. That can include using stop losses, puts, or even just standing aside and being in cash.

Being in cash is another guilt trip they try to put on me. But that is a discussion for another time.

Right now being guilty of being risk averse has taken me right out of the market and into cash. Silly me. I am smugly getting 7.5% or more on my money in four different banks. Yes, four different banks. There’s that risk aversion working overtime again, or is it paranoia?. I don’t even trust one single bank with with my money. I can get 8.5% in a term deposit too but I want to stay liquid in case one or more banks has some really bad stuff they are not telling the markets. Then I’ll rush into government bonds or other government guaranteed instruments. Hopefully I will do it in time. That’s my risk right now.

My personal bank in Australia the National Australia Bank saw its share price drop 14% on reporting another $840M in collateralized debt write-downs. They have now written off 90% of their CDO portfolio. (If US Banks do this they said their would be a calamity) This lot must have been missed from the last time they checked the rear of the office and said everything was okay. These must have been lying in a corner of the office propping open a door or something. Oops! what are these? Anyway they did the right thing and informed the market. The market over-reacted and sent their shares down too far probably. They got a nasty smack on the hand for late disclosure it seems.

Right now for baby Boomers it is all about nest egg survival and risk aversion is the key motivator here. You really cannot allow yourself to be persuaded to just buy and hold and hope for the best right now. If you can get control of your money without too much of a loss I suggest you do. The good times will come again and being a market timing sinner then could make you a lot of money for minimum risk.

When I talked to my financial planner in November 2006 he asked me to fill out a risk assessment form. After he checked the completed form he told me I was highly risk averse. I informed him that I had traded CFDs for almost a year on 3% and 1% market leveraging 97% and 99% of the stocks I purchased. But being highly risk averse I put in tight money management rules and at the end of each day I knew my financial position down to the last cent. That’s how you use risk aversion, as a tool to keep you focused. You need to respect risk. Buy and Hold does not respect risk, it ignores it.

I told him if I am in retirement and not getting the income I was used to, I am definitely risk averse. He asked me what sort of returns I was hoping to get being so risk averse. I told him I wasn’t looking for returns. I think this genuinely shocked him. I said if you can just protect my capital and occasionally show me a small return in the good years I’ll be happy.

Some financial planners would die for this sort of client. I was incredibly easy to please. If they could cover the costs of fees, charges, taxes and inflation in the early years and protect my nest egg from significant losses I said I’d be very happy.

That proved an impossible task for my wealth management team. So after seeing them practice “non-management” on my portfolio for a whole year I decided I should take my money back and rethink my strategy. I took it out in November 2007 and more by good luck than being market savvy I got my capital back and a little bit more before the crash.

This blog is all about verbalising my thoughts on what my strategy should be now and sharing it. I can sit in cash for a little longer thinking about it. There will be a time to put some money back in the markets. Until then my risk aversion is keeping me in cash. As Al Thomas of mutual fund magic says, I have a “reverse profit” right now of around 20-25% or more. Plus I’m making 7.5% on my money in a bank. Risk Aversion is a survival instinct and should be listened to and risk should be respected.

2 Responses to “Baby Boomer Guilty as Charged of being Highly Risk Averse”

  1. Martin White says:

    I am also with the nab, at least they came clean. There may be other Banks exposed!
    Some very good points in your Blog.
    Did you learn anything at the Expo

  2. admin says:

    Hi Martin,

    Thank you for commenting, they are much appreciated.

    Yes, they came clean and now ANZ have done the same thing. It always seemed odd to me that the financial gurus kept telling us the Aussie Banks were oversold but the fund managers weren’t buying them at 30% discounts or more.

    Maybe they knew something already that the general public did not?

    The US Government guarantees Fannie and Freddie and the financials shoot up in price on the stock market, NAB sells some Bonds into the rise that almost exactly cover their later announcement about the CDS write-downs.

    I’m not cynical but…. Timing is everything isn’t it?

    I am about to write a small feature post on my visit to the Expo.

    David

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