Rational Investing

by Clark Davis

Most investment firms have methods for helping investors determine their risk level, often in the form of multiple-choice or true/false questions. That is not a bad starting point. However, many of these methods fail because of one or two shortcomings.

First, the individual undertaking the evaluation, whether he is doing it on his own or with the guidance of a financial planner or investment professional, must set aside ego and perception and be honest with his answers.

If he wants to begin a realistic investment program that will serve his needs and his risk tolerance, he must be honest with himself. That means admitting to being uninformed in whatever areas of investing he has limited knowledge. It means being frank rather than cavalier when describing sensitivity to fluctuating values. It means being truthful about how much he makes and how much he will commit to investing.

It does not mean thinking in terms of how he wishes he felt about risk or how knowledgeable he wishes he were about investing. It means being absolutely candid with one's self and the professional with whom one is working. It is not a time for ego, bluff or braggadocio. Liken it to going to the doctor and giving him all your symptoms and concerns.

Suppose you went to the doctor, told him your symptoms and concerns and he asked no questions. At the end of the meeting, he gave you a preprinted prescription and said he would see you in six months. This is analogous to the financial planner or investment salesperson who has a solution in mind before he hears what your problem is. (Did he come to the meeting with sales material for XYZ mutual fund in hand?)

So, if you take a multiple-choice or true/false risk assessment, you are not alone in the requirement for being honest. The financial problem solver with whom you are working must be just as honest; just as interested in establishing your risk tolerance as you are. And just as concerned about providing an investment portfolio and plan that is appropriate for your risk tolerance.

It may take a couple of meetings to accomplish this most important of steps in rational investing. You may have additional thoughts and questions about risks, about types of investments, about volatility. You may feel that you are not as knowledgeable or sophisticated about investing as you should be and are therefore a bit uncertain about the level of risk that is best for you.

Do not rush yourself or allow someone else to rush you into starting an investment program with which you are not comfortable. But on the other hand, do not expect to be an expert in order to get started. There is a point at which you will have established your risk tolerance, determined what type of investment approach is best for your purposes and will be ready to get started.

It is at this point that you must take the most difficult step of all you must begin. And you will begin without having all the answers; without being 100 percent certain that you are correct.

If you have been honest with yourself and the financial professional with whom you are working, you will be starting out the right way. If you have not, then I suggest you begin the process again. This is too important to do with less than total commitment.

A footnote: Rational investing, especially in the early stages, is best done one-on-one; therefore, we do not recommend the use of Internet brokers, most of whom we have found to be transaction, rather than relationship, oriented.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at

clark@slia.com.)

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