Should’ve Been a Cowboy
I should’ve been a cowboy
I should’ve learned to rope and ride
Wearin’ my six-shooter, ridin’ my pony on a cattle drive
Stealin’ the young girls’ hearts
Just like Gene and Roy
Singin’ those campfire songs
Woah, I should’ve been a cowboy
– “Should’ve Been A Cowboy,” Toby Keith, 1993
When I was a little boy I dreamed of being a cowboy when I grew up. I had a pair of cowboy boots, western pants & shirt, a cowboy hat, and most importantly, a six shooting’ cap gun & holster. I spent my days running around the neighborhood with my posse shooting at bad guys.
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I stuck with being a cowboy for a long while. Then I saw Raiders of the Lost Ark. Indiana Jones was one cool hombre. From there on out I wanted to be an archeologist, risking my life fighting Nazi’s, solving hair raising puzzles, and finding lost treasures. That dream lasted until high school.
Somewhere along the line in high school my dream became emergency medicine. I wanted to work in an ER saving lives. That dream lasted all the way through high school, through the military, and abruptly ended after my first year in college. I was working 60 hours a week as night security in a hospital ER & simultaneously taking 18 hours/semester as a double major in biology & chemistry. Near total exhaustion helped me decide that I didn’t want to keep up that schedule for the next 10 years.
In my mid-20’s, I dreamed of being a true mountain man. I was commercial fishing the Yukon River at the time. (Yes, I really do know several of the stars of Yukon Men.) I wanted to build a cabin in the middle of nowhere Alaska, fish the Yukon in the summer, hunt moose in the fall, & trap in the winter. My wife didn’t find the idea of a subsistence lifestyle with no running water & no electricity as exciting as I did, so that dream died out quickly.
Nowadays my dreams aren’t so exciting. If you ask, I’ll tell you that my wife & I dream of growing old together in the mountains. We want to watch our children get married, raise their families, & chase down their dreams. We’d like to travel and experience more of what the world has to offer. It isn’t nearly as exciting as being a Nazi fighting cowboy who saves lives deep in the Alaskan wilderness, but nonetheless, it’s what we want.
The point is, at no time in my entire life did my dreams include being conservative, being moderate or balanced, or being growth. I never once said “When I grow up I want to be moderate growth.”
What about you? What were your dreams? What are your dreams? I’d bet that like me, your dreams have never included being conservative, being moderate or balanced, or being growth.
So why do so many financial advisors spend so much time & effort giving you 10 question tests which back you into a corner, slap a meaningless label on your dreams, and then begin the painful process of pounding a square peg into a round hole? It doesn’t make any sense to me.
I’ve been in finance for 20 years. I’ve talked with thousands of different people. Not once has anyone told me that their goal is to be conservative, balanced, aggressive growth, or anything else remotely close to that.
When I talk to people about their goals and their dreams, they talk about life. They talk to me about family & friends. My experience tells me that real people have real dreams, not some drivel that an academic dreamed up on a college campus.
My experience also tells me that people’s attitude towards risk changes. Attitudes towards risk can change with the political environment, the state of the economy, job security, income, family dynamics, etc … Almost anything can change a person’s attitude towards risk.
My experience also tells me that attitudes towards risk can change quickly and varies widely dependent upon outside variables.
As a result of my experience, I don’t use risk tolerance questionnaires. I have found them be completely useless, because people’s attitude towards risk changes so often and so substantially.
I was at a financial planning conference in Baltimore a couple of years ago. These conferences draw thought leaders on the cutting edge of industry research from all over the world. They’re there to learn, but they’re also there to present their research. During this conference I attended a session on assessing customer risk tolerance. Guess what I learned? Customer risk tolerance changes frequently and substantially, motivated primarily by the outside forces being experienced at any given moment in time.
I won’t go into how these Ph.D.’s “discovered” this. I’ll just say that their research confirmed what I’ve experienced in my professional life for decades.
So your risk tolerance changes rapidly and substantially. A risk tolerance questionnaire doesn’t capture that. It only catches where you happen to be at a specific point in time, say sitting in your financial advisor’s office on a Tuesday afternoon completing a questionnaire from 3:00pm-3:02pm.
The questionnaire then produces a label based upon your risk tolerance for a few minutes in time. Your financial advisor now labels you conservative, moderate, and so forth.
Your financial advisor then proceeds to manage your life savings according to where you were at for 2 minutes of your life. Wow! That’s dangerous. Your dreams deserve better.
So risk tolerance questionnaires are useless. Those useless tests then produce labels that don’t really mean anything. Those labels are then used to manage your life savings … for the rest of your life. It will be pure luck if you achieve your goals using that technique.
If your dreams aren’t to be labeled conservative or moderate and risk tolerance questionnaires are useless, why do professional insist in giving you risk tolerance questionnaires, labeling you based on your answers, and then managing your assets according to a label generated by a useless test? That is a very good question.
There are a lot of reasons financial advisors use risk tolerance questionnaires and meaningless labels. In fact, the reasons are as numerous as financial advisors themselves.
- They need to place you in an investment model managed by their home office and home office has some prerequisites, such as risk tolerance aka CYA.
- They need some justification for the stocks, bonds, and mutual funds they want to recommend to you aka CYA.
- Because regulators rarely have their finger on the pulse of what’s happening in the industries they regulate. Rather, they operate on old ways of thinking, which includes risk tolerance questionnaires. Any advisor or firm who doesn’t use them will have a lot of explaining to do to regulators who are not themselves financial advisors aka CYA.
- And so on and so forth.
Basically, those professionals & firms will claim it’s in your best interest, when in fact, it does nothing to help you achieve your goals & dreams. It may even hinder your ability to accomplish what you’ve always dreamed of.
What a risk tolerance questionnaire does do is provide a strong level of legal protection for your advisor & firm if you or the regulators ever decide to pursue action against the advisor or firm. What it does do is provide a slick marketing façade to make you think they are using sophisticated techniques to customize plans and portfolios to your goals.
Meaningless questionnaires & labels do a lot of things, but none of them have anything to do with helping you make your dreams a reality. Risk tolerance questionnaires & labels just result in advisors pounding a square peg (you) into a round hole (their preconceived notions).
If you dream of being something other than a meaningless label, then you need to manage your assets to achieve your goals. How that is accomplished is highly dependent upon your goals, your resources, and your time horizon.
Of course, managing assets to your goals requires a lot of in-depth questions & meaningful conversation. Managing assets to your goals requires that your advisor have both the knowledge & the resources to create a financial plan unique to you. Managing assets to your goals requires regular reporting & ongoing communication. Managing assets to a customer’s goals requires a lot of work on the part of a financial advisor and his firm. Perhaps that’s the real reason most advisors use risk tolerance questionnaires.
If your financial advisor prefers to use risk tolerance questionnaires & throw around pointless labels, maybe you need to change advisors. After all, your dream is to be a cowboy, not a growth.
*For the record, I still love cowboy movies & Louis L’Amour books. I did take some archeology electives in college & have watched the Indiana Jones movies dozens of times. And I’m still trying to talk my wife into living in a remote cabin high in the mountains.
Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.