That may sound like a repeated cliché, but the truth is risk was the forgotten four-letter word before the financial melt down of 2008.
It will be years before we uncover all the reasons the market and the economy cratered. While sorting through the mess on the provider side, it is obvious that investors lost sight of a fundamental investing truth:
Stocks are volatile in the short-run and may be volatile in the long run.
Stocks Are Risky
In other words, investing is risky.The financial services industry must take some responsibility for not educating or reminding investors of the risks involved.
Yes, it is their responsibility to correctly identify the risks – if the professionals don’t do it, how can individual investors who are not financial experts be expected to do it.
Financial professionals have relied on studies that tracked the overall performance of stocks over time as a way to tout their deal de jour.
Even though regulators have required disclosure that is not enough. In many cases disclosure amounts to reams of financial and legal jargon that is almost incomprehensible.
That being said, individual investors must take ultimate responsibility for their money.
Be Honest About Risk
Their first task is to honestly determine what their capacity for risk is. Many times investors are more risk prone than they really have the stomach for.This risk taking may be because they don’t understand the true amount of risk involved. It may be because they are greedy and convince themselves that they know what they are doing.
A severely down market can be a glass of cold water in the face – a “what was I thinking?” moment.
There are no easy answers, but here is a starting place:
- The regulators must do their job and get out of the laps of the financial services industry.
- The financial services industry must start listening to and believing its own marketing. A basic tenet of the industry is to “know your customer.” That means clearly explaining risks along with potential rewards.
- Individual investors must further educate themselves on the risks of investing. Investors must honestly calculate their tolerance for risk and stick to that regardless of the allure of easy money.
Will this fix the problem? No, probably not, but it will make the playing field a little more level.
You shouldn’t underestimate the power of greed to cloud investors’ minds.
