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Brian Hartstein: Welcome everybody. This is Brian Hartstein with Bayntree Wealth Advisors. It’s hard to believe it’s 2020 and we are on our first educational event for January of 2020 and I’ve got Chris Roger, one of our advisors here at Bayntree. Helps work with all of our participants in the 401k plans that we help service.
And we’re here today to review and go over an area that we get quite a few questions on. And that is how to gauge your personal risk tolerance when doing your 401k planning or in reality any type of financial planning. And we know there’s a variety of different tools and different things that you could utilize to help gauge that, but one of the things that we love to utilize here, and we’re going to walk you through today and as an employee and a participant in the 401k plans that we help service, there’s no cost for you to be able to utilize this tool.
So we wanted to kind of do a demo and show you how number one easy it is to utilize, and two how informative it is in terms of helping assess your own personal risk tolerance. So I got Chris here and he’s going to basically go straight from our website into the tool. How to utilize it from top to bottom in a pretty short frame of time. And then obviously if you have any questions, if you need help, if you want us to kind of explore that further with you, you just reach out to us via phone, via email. You can always come into our office here in Scottsdale and we will work with you accordingly. So I’m going to turn it over to Chris and he’s going to basically start from our website and take us through the entire process. So take it away Chris.
Chris Roger: Okay thanks, Brian. And again, everybody, my name’s Chris Roger, I’m one of the financial advisors here and today we just wanted to go over quickly with you guys, risk tolerance and why it actually matters and why it’s important and how you can apply it to your own planning.
So what you see on our screen here, this is our website, Bayntree wealth advisors. And we have an interesting tool on our website. If you scroll down to the bottom here, this risk profile here and you see these different risk numbers, the lower the risk number, the lower the risk. So the closer to one the more conservative or safe and investment is going to be, the higher the risk number, the closer to a hundred the more aggressive and risky an investments going to be. And a lot of times most people understand the concept, less risk, less return, more risk, more return.
So we get a lot of questions quite often on, “Well how much risk should I be taking?” And one idea is to understand the answer to that question is a lot of different factors built into it, but one of the first things and what we’re going through today is what are you actually comfortable with when it comes to risk?
Brian Hartstein: And that’s one of the reasons we utilize this tool. Very few financial decisions. In fact, if any are made in a pure numbers based logical vacuum, every financial decision you make from literally what type of lunch you’re going to eat today to the biggest purchases you may make are going to be made with some type of emotional or what we call behavioral bias or input in terms of how you’re going to arrive at the ultimate decision. And one of the things that this tool helps is not only look at the economics of risk, but it also assesses what we call the emotional behavioral component of risk.
Chris Roger: Yep. And when it comes to investing from our end, we always like to discuss the two different sides of risk. And the one side of risk is being a very aggressive investor and seeing your account actually go down in value. And then the other side is being a very conservative investor and then seeing a great year like we had last year and not making as much money.
So as you can see on my screen here, I’m just going to do an example, John DOE of $50,000. So let’s say John DOE has $50,000 that he wants to invest today and he wants to get a good idea on how much he’s going to be adding to it. Let’s say it’s a 401k. Let’s say he’s adding, I don’t know, $250 a month to the 401k. All right? Now this first question it’s going to look at what are you comfortable with in regards to risk.
And for some of you that may be closer to retirement you might not be comfortable seeing a 20% draw down and you might have more than $50,000 saved for retirement. Someone in their early thirties late twenties or even early forties, maybe because you have a long time horizon of work ahead of you, you might be comfortable with taking this much risk.
So I’ll start and just say, let’s say we’re comfortable with taking a 15% risk on $50,000. So what this software does is it looks at that point that Brian spoke on the behavioral finance side of things. And where’s your comfort zone, right? You don’t want to be taking too much risk. And then when the markets are down, you make bad decisions. And then at the same time, you want to make sure you’re keeping up with the market without going above your risk comfort zone.
So let’s just say for example, John Doe’s comfortable with a 15% downside risk, but most likely he, in this scenario, he could see up to 15% on the upside. So the first question it’s going to ask us, okay, we’re comfortable risking 15% to make 15%. now we can either go with this option here and you see how the 15% is the same? So the reward is the same, but you see this risk number here from 15%? We dropped it to 9. So a lot of times we get the question on, “Hey,” or we get the statement, “I want the most return with the least amount of risk.”
Brian Hartstein: Sounds perfect.
Chris Roger: Yeah, everyone wants that, right? But easier said than done. And managing and understanding your expectations is a big part of investing and not doing anything irrational that could potentially hurt your return. So let’s say for example, and then on the other side, we have the same type of risk level, but more reward.
So, and this example we said John Doe, we said he’s 40 years old. He’s got $50,000 in his 401k. Let’s say he is comfortable with this 15% risk to the downside. So he’s risking 15% to see potential upside of 22% so we’ll go with that.
Now the next thing it goes through is, okay, well we were said we were comfortable risking 15% to make 22%. now are we comfortable risking 18% to make 27%, right? So what this means is, well, maybe our risk zone or initially wasn’t 15% maybe it was a little bit more. So in this example, let’s just say, yeah, John does comfortable with the 18% risk. And then it’s going to ask you, okay, are you comfortable bumping up the risk another $600 or so to make about another $1,000 or $900 or do you want to stay where you are?
And let’s just say, you know what, I don’t want to risk more that than the $9,000 I’m going to stay here. So what this is going to do is give us a risk number from one to a hundred. So we can say, “Okay, John Doe, right now your risk number’s a 79 and really your comfort zone with your $50,000 if it dropped down to $41,000 you’d still feel comfortable with that.” And most of us are going to feel comfortable with a 26 plus percent return.
That’s usually not an issue when you make money, right? Everyone wants to make money, but you got to understand the risk that you’re taking to get it. So if you head to our website again, if you go to our Bayntree website, Bayntree.com and you go down to this riskalyze tool here, you can go through this very brief exercise yourself to determine your risk number and then from there you could reach out to myself or any of the other advisors on our team here to get some advice and recommendations on how to make sure your money and your investments are actually in line with this risk number that you’ve produced here.
Brian Hartstein: And that’s a great point, Chris. It’s not only producing what your risk number might be and sometimes this exam might take you or this tool might take a little longer to go through depending on the answers to your questions. But when you ultimately get a number, then it’s looking at your 401k account or maybe another investment account and making sure that what you have allocated in there in terms of the investments matches your level of risk.
Because that’s where we see the biggest areas is somebody’s level of risk is a 79 and they’re either taking too much risk or they’re taking too little risk with the way that they’ve got their investments built. So it’s important to make sure those things are congruent and that, like Chris said, not only do you know your level of risk, but your investments reflect that and that you stay on track and try not to deviate from that plan by making knee jerk or short term reactions to the market or other factors that might cause you to kind of move off that path and move off that plan that you built for yourself.
So anything that we can do here to help you in terms of helping engage a level of risk, looking at the investment, building that plan. Chris might want to put our contact information back up there, but again, feel free to call us. Feel free to email us. You can always try and make an appointment and stop by. That’s part of what we do and again, it’s no cost you as an employee or participant in one of the plans that we help service. So again, appreciate your time. Looking forward to talking to you the rest of the year and looking forward to a very healthy and very prosperous 2020. Thanks everybody.
Chris Roger: Okay. Thank you everybody. Take care.