Risk Avoidance: Risky for Small Business Investors

Risk
Risk (Photo credit: The Fayj)

When I first joined Wachovia in 2008 (you may know us as Wells Fargo), one of the first things I was told was that “Sometimes you buy stocks when they are down so you won’t get tempted to buy them when they go up.” I feel it was great advice. It tells me there are subtle risks in stocks that are just as real as the obvious ones.

Academics define risk in terms of volatility. Most of the Small Business investors I know do not worry that the stocks that they own will go up too quickly; that would be a wonderful feeling! They worry that what they own will go down in price and that they will lose money; pretty normal if you ask me. Losing money is painful. It’s only right that we all want to avoid doing it. That being said, I am not 100% sure that this risk should be avoided at all costs.

Overtime, we have been shown that stocks seem to defy the rules of supply and demand. In most cases, higher prices mean less demand and lower prices mean more demand, which is not always true in the capital markets. Sometimes when an asset appreciates, there is a belief in further appreciate of that asset in those who have not participated in the rise. Those who have not bought in experience remorse. The feeling can exist even more if that rising asset was avoided because of fears of losing money. In addition, an alternative asset was purchased as a result of expected lower risk when unfortunately little or no return was given to its holder causing even more remorse.

It can be painful not to own stocks as they are going up. Investors feel they have “missed the boat,” which can cause one to enter the market at higher prices and set the stage for future losses. I believe that investors should be risk averse, but I also believe that they should be aware of the bucket of risks that exist. I feel that the future is risky by nature. One cannot avoid risk but one can manage it. A diversified portfolio may mean that you are never entirely right, but guess what? The chances of you being entirely wrong are not so great. When was the last time you rode on a Ferris wheel. It would be stupid to invest all of your assets on one bucket. What would be smart is to divide those assets into several buckets in that Ferris wheel. Should one bucket tip, you have others to stabilize that one bucket’s loss. If you ask me, 100% cash portfolio can cause almost as much trouble as one that is 100% common stocks.

In my opinion, there is still room for appreciation. The world is still far from perfect. The perceived risks of stock prices are still widely felt. Is the least understood risk the risk of no equity exposure at all?

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JASON FUCHS is a financial advisor for Wells Fargo Advisors in the Alexandria, Virginia area and can offer you a wide range of financial and investment services.

 

Hiring the Right Professional

Wow! I'll Buy One! cartoon by Clay Butler

 

Delegation is a skill that when done properly, saves you time, creates a circle of support, and enables you to achieve much more than you could on your own.

Hiring the wrong person wastes huge amounts of money invested in people not capable of delivering what you need them to do. It also steals massive quantities of time you did not budget. Women have particular difficulty delegating–as they often don’t want to burden others who may have full plates, are afraid to ask for what they need, and are hesitant to be too probing when interviewing.

My client, Emily, came to me with a history of poor delegation experiences. Whether hiring a handyman, housekeeper, assistant, or architect, she always ended up shocked and disappointed at the work they produced, feeling like all the dollars (and hours) she and her late husband had invested went swooshing down the drain.

The latest: she’d hired a fitness coach to put together an exercise and nutrition plan for her. Her assumption was she would get a complete program – a month’s worth of workouts and a month’s worth of menus. She expected instruction on the workouts and recipes to go along with the variety of menus. After paying a small fortune, you can imagine her shock, when all the fitness coach sent was an exercise book describing different types of exercises she could do, shopping guidelines, a handful of meal suggestions, and links to online websites with recipes. In analyzing the history of their communication, we discovered where Emily had gone wrong–she’d been very unclear about what she’d hired the fitness coach to do. I suggested Emily reach back out to the man, explain the mistake, and ask what it would take to get what she wanted.

Here’s what she learned:

It took me a while to work up the nerve to call Bill. I had a really hard time getting in touch with him, too. I finally heard from him after a few phone calls. Seems he has a different approach to fitness coaching – I was looking for a structured, detailed plan. I would show up, he would tell me what to do, and I would head home and follow his recipes. Bill’s approach is based on giving me the tools to make improvements. He doesn’t coach his clients through the workouts, and he doesn’t have the “bank” of recipes in his database I’d assumed he did. He believes in cooking based on ingredients I enjoy eating the most. Ah, well. Looks like she was never the right match.

Based on my experience in looking for the right assistant, I provided Emily with an organized process for improving her batting average with future hiring of the right professional.

  • Define your expectations. Sit down with pen and paper and ask yourself the following: How will I measure success for the money I am investing in this person? What do I expect they will bring to the project or task that I can’t do myself? List the time, skills, and talent you imagine this person needs to do this job (i.e. creativity, flexibility, speed, integrity, etc.), and devise questions that will probe at their skills in each area. Being crystal clear on what you want makes it easier to recognize the right resource when you find it.
  • Interview based on historic performance, not future vision. When interviewing, we often ask questions in hypothetical terms–e.g. “How WOULD you do something…”which only produces answers based on what the candidate thinks you want to hear. History (or behavior) based interviewing stems from the belief that the greatest indicator of future success is past behavior. Try asking for examples from past job experiences, using questions that begin- “Tell me about a time when…” or “Give me an example of a moment that…” You’ll be amazed at what you hear. By listening to each candidate’s detailed stories of what they have ACTUALLY done, you are in a FAR BETTER position to evaluate if they are a good match for your needs, and have the experience to deliver on your goals.
  • Comparison Shop (at least three candidates). Emily had hired this fitness coach without doing her homework. It was on a whim, after hearing about the experience of a friend of hers who had recently moved to a retirement community in Florida. Emily was so enamored with the experience her friend had received, and she assumed all fitness coaches operated in a similar fashion. Always interview at least three candidates, so you have options to compare and contrast. Shopping allows you to pick the person who is the best match for your specific needs, and often helps you learn what is reasonable to expect.

Taking the time to be clear and methodical when hiring, may take longer up front, but it could surely help save you beaucoup dollars (and precious time) in the end.