The 1 Answer That Could Determine Where All Your Money Is Invested

DANO WEIR: Shelby, Daren and I are known to be cringy dads who make all kinds of dad jokes. And so I thought, oh, when I'm Shelby on the episode, we're going to talk about risk tolerance. What dad joke can I start with? Can I have Daren show up in sunglasses and a white shirt and do some risky business? That would be good.

DAREN BLONSKI CFP®: New Balance shoes on.

DANO WEIR: Sam Smith in one of his James Bond songs says, Risk it all. Can I sing that song to her? But I decided instead, we're going to play the board game Risk. Right, Nat? No?

SHELBY WIRICK: You do have a good voice, though.

DAREN BLONSKI CFP®: Let's not do that.

SHELBY WIRICK: I've never heard you sing.

Welcome to It's All Money. All right here in front of you.

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DANO WEIR: Hey, welcome to It's All Money. Joined today by, I'm Dan O'Weir, your host. I'm joined today by Daren Blonski, co-host, CFP, and I'm joined, our first guest on the show. Please welcome to the show with a round of applause, financial advisor, Shelby. Hi, Rick.

DANO WEIR: And Shelby, we are talking about risk tolerance. Don't fall asleep.

SHELBY WIRICK: So fun.

DANO WEIR: Daren, did you fall asleep yet?

DAREN BLONSKI CFP®: What?

DANO WEIR: This is a topic that I have heard of as a layperson before I worked here for years, and it sounds extremely boring, and I never understood how important it was until I worked here. And I thought, you know who knows this well, who deals with this day in and day out as she helps the families of Northern California is Shelby. So first off, welcome to the show. Thank you for being here. And tell me, what is risk tolerance?

SHELBY WIRICK: Risk tolerance is... Someone's sentiment to how they feel with their investments and how those investments are performing and at what point are they having that emotional instability if their investments are down or if they're celebrating when investments are up. And it's important for us as advisors to understand where they stand.

SHELBY WIRICK: And how that ties into their financial plan your your tolerance and and what you're okay with when it comes to your investments is key when you're looking at your full financial picture because your score and your level of comfort whether you're conservative or or aggressive is a key point a key component to your financial future i'm so glad you said the word score.

DAREN BLONSKI CFP®: So as can I drop a history bomb here? I feel like I just like, I have to put some history in here for people to understand some risk tolerance.

DANO WEIR: Well, he's paying for the show so he can drop all the bombs that he wants.

DAREN BLONSKI CFP®: So risk tolerance, like you mentioned score Shelby score is more of a, let's call it a creation of Wall Street. Right? So what I always like to tell clients is that first and foremost, we need to understand that Wall Street is a manufacturing business period. So if we understand that Wall Street is a manufacturing business, we can put every other thing we think about in Wall Street in context of that manufacturing business.

DAREN BLONSKI CFP®: Wall Street wants you to invest in things that align with your comfort with big mean word of volatility, up and down. That's what all volatility means, right? How much up and down does it do?

DAREN BLONSKI CFP®: Well, over time, there's been a lot of liability of investors being put in investments. That didn't align with their up and down comfort. Because of that, Wall Street created these things called risk tolerance. What's their comfort with intolerance with risk?

DAREN BLONSKI CFP®: One of the tools out there is a tool called Riskalyze, is where we get our scores from. But there's a thousand of them out there. And anyone who's ever had an investment account, they've got these really annoying calls from their advisor or from home office saying, hey, you need to complete and update your annual risk assessment.

DAREN BLONSKI CFP®: The reason they're doing that is because we're trying to align your portfolio with your comfort with risk. So if it all hits the fan, we don't get in trouble. It's as simple as that.

DANO WEIR: So I'm glad you put it that way because- You just laid it out. So as- As I was working with Shelby, because Shelby works on the front end of a lot of, she's in touch with the community, she's in touch with new clients.

DANO WEIR: And so she's working and learning about their situation. And as she and I were working together, I was realizing, and I'm working my way into this business, so I'm understanding it almost from the outside in. I go. Wait a minute, this risk score determines like completely where your money ends up, like this one thing.

DANO WEIR: And so it, you, you kind of think, I don't really know what people think, but my impression of when you come to a financial advisor is we have a conversation and, and then you go like, yeah, these are the stocks that I think are cool.

DANO WEIR: And I go, cool, put it in that. But in fact, it's this process of determining how much are you willing to like, let it go up and down and be cool with it. And it all kind of hinges on that score.

SHELBY WIRICK: We call it the puke point, right? So if you're on a roller coaster, you're at Six Flags, and you're riding the wave, right? The market's ebb and flow. At what point are you wanting to get off that roller coaster because you're about to puke, right? And that is a process. So Daren hit on Riskalyze.

SHELBY WIRICK: So when we have a client...

DAREN BLONSKI CFP®: Which is a product that we don't necessarily endorse, but yes, Riskalyze.

SHELBY WIRICK: So when we have a client come in, we do a very in-depth questionnaire asking them a series of questions with what are their financial goals?

SHELBY WIRICK: How do they feel about their financial future? How do they feel about the markets? And then we go into a series of scenarios of, hey, here's scenario A, here's scenario B, in a hypothetical portfolio, various gains and losses, how do you feel?

SHELBY WIRICK: And It's sometimes feel feels very redundant, but it's important for us to fine tune that number. So if you think of a number between zero and a hundred zero being you're very, very risk averse, you, you are very worrisome of how your money is going to perform.

DANO WEIR: I don't want to be involved in the market at all. I want the money in my checking account to stay that way.

SHELBY WIRICK: Right. To a hundred where let's invest everything in Bitcoin.

SHELBY WIRICK: Super aggressive, right?

DAREN BLONSKI CFP®: Some would argue that Bitcoin's stable.

SHELBY WIRICK: Some. Some would.

SHELBY WIRICK: So where do you fall between zero to 100? And whatever that score is, you're assigned a number. And then that number corresponds to various portfolios that we have. And so.

DANO WEIR: With some room for adjustment, I would imagine. Absolutely. So you're not necessarily slotted. Oh, you have to be here. If some, you know, there's additional information. And that's part of where some of the finesse of the job of the financial advisor is to figure out, you know, where, what someone says on their score versus other information that maybe doesn't fall into the test.

SHELBY WIRICK: Exactly. You know, the portfolios and the score are not cookie cutter. Each client is unique. Each client's situation is unique and different. And so that's why these meetings are so key before we ever go into any planning. Or investing to really have a full understanding of how they feel about their portfolio and making sure that we're in line with them.

DANO WEIR: And Daren, this is another phrase that seems like it's the same thing. Risk tolerance seems like it would be the same as risk capacity, but it's not.

DAREN BLONSKI CFP®: It is not. Sometimes people's risk tolerance is actually really high, but their risk capacity is really low.

DANO WEIR: What is risk capacity and how is that different?

DAREN BLONSKI CFP®: Capacity is your ability to... Financially withstand volatility in your portfolio. So if there's a lot of up and down, but you're really dependent on that portfolio for a monthly distribution, because that's what helps pay your bills, we call it a high reliance factor, you have a low capacity for risk.

DAREN BLONSKI CFP®: When you might emotionally have a high capacity for risk, it would be incorrect if you're potentially incorrect, if you're pulling a lot of investments off the portfolio or assets off the portfolio while it's going up and down.

DAREN BLONSKI CFP®: So it's always important to understand that there's risk tolerance, risk capacity, there's reliance on portfolio. There's a lot of different factors and risk tolerance, the scoring methodology that Shelby's talking about is one of the tools we use to facilitate communication. And it's communication between what your expectations as an individual is and what an advisor's expectations is.

DAREN BLONSKI CFP®: The challenge that has... Come about of all the, and we talked about this in our last show about retail investors and how this is an institutional world. And now we have 20% of the market being retail investors. The challenge that's been brought into the investment world is a lot of times people go into the market and don't understand their comfort with risk.

DAREN BLONSKI CFP®: They go in, they make some money on one stock. I call it the rule of five, actually. If you take your money and you put it in five different stocks. Stocks. One stock's going to knock it out of the park and you're going to brag to all your buddies at the barbecue about it. It's the cool one at Christmas party. You need to tell the guy that your buddy that you really did well or whatever.

DAREN BLONSKI CFP®: The second one is going to blow you up. They're going to take half that money back. And then the three other stocks, they're going to do nothing. They're going to die down. So rule five, I don't care who you are. Law of averages, pick five. Chances are you're going to hit the Law of average. Most of us are average, even though our moms told us we weren't.

DANO WEIR: So then, Shelby, it sounds like there's a potential that someone's risk tolerance score is not necessarily accurate to what they actually are. Because it's possible that someone could think that they are a certain way, but then maybe by other information that they share or, you know, based on other factors they're not necessarily thinking about, maybe their tolerance is actually different than what their capacity is.

SHELBY WIRICK: You'd be amazed at how many people think that they're either really conservative and end up being really risky or vice versa. And so the one thing that's really unique about having this specific meeting with our clients is. You start to see the behavior and the emotion come out when you answer those questions.

SHELBY WIRICK: And so we take the time to really have those conversations with them and walk them through that thought change too. Because if you have an idea, I'm ready to ride the market and I'm totally aggressive. And then all of a sudden it's a complete swap in that meeting. Then we're really slowing down to help them understand, hey, I don't think you're as risky as you're answering these questions, and here's why.

DAREN BLONSKI CFP®: You know, what's interesting to me, points I'm out, is most investors, I'd say the average investor that comes to us is actually bipolar, right? They'll have a whole lot of really conservative stuff, like all my money in the bank, and a whole lot of really risky stuff, like Nvidia stock, right? Or Bitcoin or whatever, right? And they got these really risky, and we also call that a barbell portfolio.

DAREN BLONSKI CFP®: I would say, anecdotally speaking, 70% of people that come into us, they go, here's my portfolio, and it's a bipolar or barbell portfolio. And our job is helping them stretch that risk through the spectrum of risk and bringing some of that really risky stuff in a little bit and bringing some really conservative stuff up to keep up with inflation.

SHELBY WIRICK: Find a happy medium.

DANO WEIR: Yeah. So, Daren, what are some types of portfolios?

DAREN BLONSKI CFP®: So there's lots of types of portfolios. I'm going to talk generally to the, I call it vanilla land.

DANO WEIR: Mega, mega, general, super.

DAREN BLONSKI CFP®: Vanilla land, right?

DANO WEIR: If you went to the Walmart stock market, it would be on the shelf.

DAREN BLONSKI CFP®: This dollar store. So in vanilla land, your portfolio is generally comprised of two elements. One element is stocks or equities. The other element is bonds or debt instruments, right? So the way to think about... I like to think about to make it really simple is that stocks are ownership. You get to own different things and bonds are loanership.

DAREN BLONSKI CFP®: You get to loan your money to different things, right? So when you think about it, stocks are historically more risky than bonds because they're more volatile. Bonds are less risky than stocks because they're less volatile. And if you think about it, it makes sense, right? Because if I'm loaning my money to something or someone, I'm getting that money back at some point.

DAREN BLONSKI CFP®: When you own, you don't necessarily get it back. Like if that company goes belly up, it's gone. Bye-bye. So you have ownership and lonership. And then how much ownership you have versus lonership has to do with, lonership sounds like kind of a weird word, lonership. So lonership, like you're a loner or you're a loner. So you was learning that.

SHELBY WIRICK: Your money.

DAREN BLONSKI CFP®: You're loaning your money, right? So it's loanership. It's not like loanership, like you're a nerd and you're by yourself in the corner. It's like loanership. And so we've got ownership and loanership. And then you've got, if you're more risky, you're going to own more things.

DAREN BLONSKI CFP®: And if you're less risky, you're going to loan more things, right? So someone who's maybe advancing towards retirement would consider more loans than owning because they want less volatility. Someone who has less risk tolerance might want more loans.

DAREN BLONSKI CFP®: Someone who is... More risk interested might have more ownership. And that's what you're trying to figure out with different communication tools like risk tolerance is what's that ownership to loanership ratio and what makes sense for you in your financial needs and what your capacity for risk is.

DAREN BLONSKI CFP®: But here's the thing. Most investors invest and think they should love everything in their portfolio, which is a misnomer because there is one free lunch in investing and it's called diversification.

SHELBY WIRICK: So diversification is key because you want to have the balance, right, between ownership and loanership and figuring out what that ratio is. But when you're looking at both of them, how can you make sure that those investments are diversified? So when I say diversified, not just having all of your stocks in just tech. You could do that.

DAREN BLONSKI CFP®: And you would have been really happy this last couple years. Now this is 2024. August of 2024. Three months from now, you might be very miserable.

SHELBY WIRICK: Or in 2020. Dare we talk about that.

DANO WEIR: So diversifying would be in different sectors of the economy other than tech. I have a shipping company. I have Pepsi. I have whatever it is.

SHELBY WIRICK: Energy. Finance, there's tech industrials. I mean, the list goes on, right?

DAREN BLONSKI CFP®: A great example would be Starbucks. Did you notice last week what happened to Starbucks when they stole the Chipotle CEO and put in the, him in the Starbucks seat stock went up like 25% in a day. That's what happens with ownership. Cause all those owners are like, yeah, let's go.

SHELBY WIRICK: We know how you feel about Starbucks.

DANO WEIR: Starbucks is starting to drive me nuts straws the straws the paper straws you were saying that if you notice how like you get a paper straw and it pinches it you can't even use it you can't have your coffee you literally can't even use it that's what I'm saying I love the planet too but I need I do need the straw to work let's find a way to make it work for both anyways diversification maybe the Starbucks new CEO will hear this podcast so much that would be awesome hope so hope change of time so you need something I've heard you say this before You need something in your portfolio that you hate.

SHELBY WIRICK: Yes, exactly.

DANO WEIR: And that's diversification? Because why?

SHELBY WIRICK: Well, when you look at diversification, yes, you can have the different things that I mentioned before, right? Different types of investments, whether it's financial, it's tech, et cetera, healthcare. But we also look at not just stocks and funds within the U. S., but also international.

SHELBY WIRICK: We look at counter-cyclical. So alternatives, so futures and gold, other things like that are help when you're looking at the total picture of your portfolio and not having it so concentrated in one area.

DAREN BLONSKI CFP®: Most investors are concentrated in U. S. Stocks. That's the biggest, you know, we talked about barbell portfolios. So typically we'll see portfolios come in in a whole bunch of money in cash and a whole bunch of money in U. S. Stocks. In this day and age, they're usually growth stocks.

DAREN BLONSKI CFP®: Right because that's what's been going up we've had the magnificent seven and now they're going back up like there's this part of me that's just oh come on let's get the diversification working here i found this incredible slide it's from a state it's from a study from yale this is also coming from the journal of financial counseling and planning and they basically they basically i know you Daren you read that right you know of course when i get My Journal Of Financial Counseling And Planning.

DAREN BLONSKI CFP®: I sit there and just read.

DANO WEIR: So if you're listening to this, this is a graph looking at, it's comparing through their survey. They surveyed people and they compared the sentiment towards whether they were willing to take any risk, sorry, unwilling to take any risk in comparison to what the S&P actually did.

DANO WEIR: And Without getting too detailed for our audio audience, essentially, in the 80s, you had up to 50% unwilling to take any risk in their portfolios. And then that number steadily drops.

DAREN BLONSKI CFP®: You call that steadily? That doesn't look steadily. Well, it falls off a cliff.

DANO WEIR: Falls off a cliff. Sorry. Falls off a cliff.

DANO WEIR: In comparison to what the S&P was actually doing, then as the S&P is rising through the late 90s and into the 2000s, people are starting to... Basically, you're able to see the change in people's sentiment towards whether they are or aren't willing to lose anything in their portfolio. In particular, in 2008, on this particular graph, you can see that suddenly they're unwilling to take any risk again.

DANO WEIR: So... I only show this to say, and I had this conversation, I wanted to have this conversation today because it's such a crystal example of how emotional this whole thing is, right? This has nothing to do with numbers. It has nothing to do with the fundamental aspects of the company. It has to do with, are you okay?

DANO WEIR: Not like, hey, what does the calculator say I should do with the money? No. Are you okay with the value going up and down? Is your psychology going to be able to handle losing 50% of your portfolio for the chance to make 30? Knowing that piece and that that's such a huge piece, in fact, that might even be the only piece, is just mind-blowing to me. Am I wrong?

SHELBY WIRICK: No, you're spot on.

DAREN BLONSKI CFP®: I often say that when we're talking about how we provide value as a financial advisory firm, there's all these Fancy charts, all these Fancy computer systems we use. I often say that what our clients really value most from us is they want to know they're okay. Whatever that means to them. And our job is to figure out, are they okay? And with the highest degree of probability, say, you're okay. That's an emotional thing, right?

DAREN BLONSKI CFP®: Investing is emotional. And the minute we try to bifurcate that and not acknowledge the emotional component, we've begun to lose.

DANO WEIR: So when you're sitting down with a client, Shelby, and you're having the conversation. You're one, seeing them as a person, you're getting to know who they are, they matter to you, but they're also in a way giving you the back of their baseball card.

DANO WEIR: And so I had you pull up a couple of scenarios and summaries of what you might see from someone that might eventually affect their risk profile. Just curious if I wanted Shelby to share these to say, you probably don't think about yourself in this way, but this is in fact what can affect, you know. What your financial plan actually is.

SHELBY WIRICK: Yeah. So, I mean, gosh, kind of going back to what we were talking about before, where there's so many different types of clients and it's not cookie cutter. An example of one person would be, someone who is recently retired. They're receiving a pension, getting social security, has multiple properties. So high, high net worth.

SHELBY WIRICK: They're not necessarily reliant on. Their specific portfolio. You know, their goals are to travel, have some remodels in mind for some of the properties. Generational giving is huge.

SHELBY WIRICK: They may tell us that they're okay with volatility. But then, you know, during meetings, we do a portfolio review and then all of a sudden, maybe the portfolio is down a certain percentage and you start to see that anxiety kind of kick in. And we'll take the time to talk about that. You know, they is is where they're currently at. Ok.

SHELBY WIRICK: And if not, let's reassess. But it's important to know, you know, we have these check ins frequently to understand that there's that that risk tolerance is still accurate. And if it's not, how do we adjust? Should we adjust? And if so, how do we do so that we're matching that that level of emotional? I don't want to say security, but emotional, like, okay.

DAREN BLONSKI CFP®: You know who FOMO and YOLO are?

SHELBY WIRICK: Sure know about YOLO.

DAREN BLONSKI CFP®: FOMO and YOLO, right? So this is really just a conversation about FOMO and YOLO. And what's interesting is we actually find it more difficult to keep clients invested appropriately when the markets are ripping high. Because when it's ripping high, everybody's got FOMO, fear of missing out, and they want their money invested in the...

DAREN BLONSKI CFP®: Hottest stock and they want to make all the money. And we're like, whoa, timeout, we got to diversify. And then there's YOLO, you only live once. And people that also that emotion of people saying, oh, I'll put all my money on and how do you pronounce that again? That's how they ask it to us often.

DANO WEIR: Okay. Give me another client. Let's say it's a totally different scenario.

SHELBY WIRICK: Let's see. Client B, this person comes in, tells us that they're really risky. Have a million in investments, single.

SHELBY WIRICK: They're taking social security, but are going to need to be, that's not enough. They need to be reliant on their portfolio. So do a full risk-alized assessment with them, risk assessment with them. And they're saying, let's ride the wave.

SHELBY WIRICK: Fun fact though, you can ride the wave, but if you're reliant on that portfolio, That's maybe something we should consider.

DANO WEIR: And that would be an example of risk capacity being out of whack with your tolerance.

SHELBY WIRICK: Exactly. Risk capacity and tolerance are off. So let's dig in deeper to talk about that.

SHELBY WIRICK: So all of that, all of those factors are key when looking at the bigger picture. And are you going to be okay?

DANO WEIR: And. As you're describing this, the reason why I wanted you to read this to me, it almost sounds like your doctor talking about a patient who's presenting with a condition. I've got a 55-year-old female. I've got, they're presenting with X, Y, and Z symptoms.

DANO WEIR: If you're wondering what a financial advisor does, among many other things, it's the upfront work and getting to know you, what your goals are, what your capacity is, because at the end of the day, at least I can speak for this firm, Sonoma Wealth Advisors. We want you to feel okay. We want you to feel good. That's what we're trying to do. We're trying to help you win. We're a fiduciary.

DANO WEIR: Determining what some of these elements are. Can be very, very helpful and can ultimately, we hope, lead to your success is what we would hope.

DAREN BLONSKI CFP®: You know, I want to just drop back on one point because you made the mention of fiduciary. And I think that's so important because everything we've talked about in this episode is about vulnerability emotionally, right? Like we're getting really vulnerable with our clients and them and they're talking about how they feel, how they think.

DAREN BLONSKI CFP®: And when you really stop and think about it, the idea that... This industry's evolved in such a way where you get them vulnerable with the client and they flip a financial product on you as a brokerage would do. It really makes you question things.

DAREN BLONSKI CFP®: Like that's why it's so important if you're going to have an advisor to have an advisor that has to work in your best interest by statute, because otherwise you're creating this massive conflict and you're putting yourself in a vulnerable, dangerous position. Because now that you've opened up with that advisor. They can sell you anything they want.

SHELBY WIRICK: I think also building that trust and answering the question, are they working in my best interest? And are they in line with my goals? Because if those questions aren't answered, then that's something to reconsider.

DANO WEIR: I can't believe we did it.

DANO WEIR: A whole episode on risk tolerance. Eyes are open.

DAREN BLONSKI CFP®: Wow.

DANO WEIR: She only had one cup of coffee.

DANO WEIR: We hope that today's episode was educational for you. It's something that seems, again, extremely boring. And yet I was stunned to find out. I think this might be the core piece to it all. So Shelby, thank you so much for joining us today. We really appreciate it.

SHELBY WIRICK: Thank you, guys.

DAREN BLONSKI CFP®: Thanks, Shelby.

ANNOUNCER: This content was produced by Fermata Advisors, LLC, an SEC-registered investment advisor.

DANO WEIR: DBA, Sonoma Wealth Advisors.

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