Q. How do couples come to an agreement when one is risky and one is not? Right now all my investments are conservative and my wife’s are risky.
A. It’s possible to find the right balance when one partner has a much higher risk tolerance than the other.
It’s pretty common.
To get to the right answer for your and your spouse, the first step is education, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.
“Investors often think that a 100 percent bond portfolio is without risk and that is the first thing on which we try and re-educate them,” Feit said. “Bonds, especially in a rising interest rate environment, can lose value unless they are held to maturity.”
This is not a problem for short-term bonds but it is with longer term debt, she said.
Feit said it’s important to look at a couple’s long term financial plan.
If the plan requires a 6 percent rate of return to be successful, then the conservative partner may need to realize that a bond portfolio with an expected return of 3 percent will not get their goals met, she said.
“I like the plan to be the first step in determining a required rate of return, then it is the advisor’s responsibility to construct a portfolio with the appropriate risk-return profile,” she said.
She said when you mix less correlated, different asset classes together, you bring down the volatility or risk of a portfolio.
For example, take a bond portfolio with an expected return of 2.8 percent and expected risk of 4.5 percent. Compare that to a stock portfolio with an 8 percent expected return and 15 percent expected risk. If you allocate half of your assets to each asset class, the resulting portfolio would have an expected return of 5.4 percent with an expected risk level of 7.7 percent.
“In creating a diversified portfolio, we have increased potential returns as opposed to an all bond portfolio and reduced the expected risk of an all stock portfolio,” she said. “The less ups and downs a portfolio experiences while still growing, makes for much easier, less stressful dinner investment conversations.”
Feit said as in most relationships, there are going to be differences of opinion, whether its related to child rearing, TV shows or household tasks.
“Agreement over investment risk is perhaps the easiest relationship issue to mitigate with the use of asset class diversification,” she said.
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