The irony of the conservative investor

In an episode of West Wing (still one of my favorite shows!), two characters are talking about PBS television and one of them says that more people claim to watch PBS than actually do watch PBS. The reason is: People like to think of themselves as being PBS watchers even if they aren’t.

Likewise, many philosophers and gurus have shared the following wisdom (which I’m collectively paraphrasing): You can tell a lot about a person, not by what they say but by what they actually do.

With this in mind, I want to talk about the irony of the conservative investor.

Many people who claim to be conservative investors are not really conservative investors. They’re just ignorant aggressive investors.

My parents would describe themselves as conservative investors, as would several of my friends. But when we talk about their actual investment practices, the situation is VERY different. And they are not alone. I saw this when I was a stockbroker, and I still see it today: If you were to ask people if they were conservative investors, you would get a lot people saying they are because they think of themselves as being careful and risk averse.

But they only THINK they are conservative investors… they really aren’t. They believe they have carefully invested their money into quality stocks that are widely diversified, and that their investments are truly safe (in spite of the fluctuations of the market).

But my experience with investors tells me something completely different.

Investors put some of their money into mutual funds based on advice from others or on past performance (in spite of the disclaimers). And, they put some of their money into equities but they chose those equities based on over-the-fence hearsay from their neighbors and friends… or because they spotted the name of the stock on the 6 o’clock news or on a magazine cover.

Ask any advisor and they will be able to tell you a story that is similar to this one: They’ve been advising a client to go into a blue chip stock for a while but the client is reluctant because they feel the stock market is too risky. But then those same “conservative” clients call up the broker because their neighbor knows someone who is suggesting they jump into a penny stock… No due diligence; no second-guessing; no analysis against portfolio goals.

I even had one brand new client show up at my office once and, even though she described herself as a conservative investor, randomly point to a screen of stocks and ask to put her entire available capital into ‘that’ one… just because everyone else was investing in stuff and she wasn’t.

Many conservative investors are not conservative at all. Part of the problem is simply not knowing how to invest — they think they can diversify themselves out of all market risk. But part of the problem is that they aren’t the conservative investor they think they are — they don’t want to do due diligence and they jump on whatever hot stock there is right now.

What’s the solution? I’m not sure. Most good stockbrokers and investment professionals will talk their clients down from the ledge of aggressive investing but wouldn’t it be great if investors were shown HOW to be conservative investors before they picked up the phone to call their broker? I think education is the only answer.

I was recently talking to one investor who was frustrated by the market and wanted to put all her money under her mattress… and just didn’t “get” what I was saying when I tried to explain about the costs of inflation. And another investor asks me for stock ideas but he only wants ideas of stocks that go up… as if I would know that ahead of time. (Disclaimer: I don’t give stock ideas at all, but people ask me for them all the time, which should be a sign of a non-conservative investor!)

Perhaps what needs to happen is that advisors and financial professionals need to draw more of a connection between the claim of what it means to be a conservative investor and the actual practice of being a conservative investor. When someone states on their investor application form, for example, that they are conservative, it should put them into an educational program where they are equipped to be conservative. They should be able to know the qualities or characteristics of a conservative investor and be equipped to make decisions through the lens of a conservative investor. And there should be a more difficult process to switch from conservative investing to aggressive investing.

Perhaps stockbrokers need to share the due diligence process with their clients (instead of just having a conservative client show up and say: “Put some of my money into Bre-X”.

A seminar series about conservative investing might help people to understand what it means to be conservative.

Ideally, a conservative investor who gets a great stock idea (from their completely unqualified-to-give-advice friend) should have an easy step-by-step method to do their own initial due diligence before they call up their broker and ask to put some of their money into the stock.

There are many people out there who claim to be conservative investors but their investing practice suggests something entirely different. I think it needs to be fixed.

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