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By Christine Benz | 06-14-2010 12:06 PM

The Risk of Playing It Too Safe

Planner Mark Balasa of Balasa Dinverno & Foltz on the downside to some investors' intense risk-aversion and faulty sense of their own risk tolerance.

Note: We are refeaturing this video as part of Morningstar.com's November 2014 Risk Management Week. This video was recorded in June 2010.

Christine Benz: Hi. I am Christine Benz for Morningstar.com. One under-discussed risk is the risk of your own behavior, the chance that you'll buy high and sell low. Here to discuss that risk for us today is Mark Balasa. Mark is a Principal at the firm Balasa Dinverno & Foltz. Mark, thanks so much for being here.

Mark Balasa: My pleasure.

Benz: So, Mark, I know that you are a student of investor behavior, and one thing I'd like to talk to you about today is, how you are helping clients not play it too safe in this environment? So we went through a traumatic bear market where people really did have to change their lifestyles in the wake of the money they lost. How do you talk to people about the risks of playing it too safe, which is where their comfort level might be?

Balasa: Great question. It's a tough environment for a lot of people as you just described and so for them many times the emotional part of their brain kicks in over their logical parts. So I'll give you a quick example of someone – a client of ours that came in actually, not even three weeks ago. So she comes in, she's a widow, she has got six children, and she has saved a fair amount of money, just short of $1 million for herself over her lifetime. Again, she's widowed, and her children have all had difficulty in the job market this last 18 months or two years, and so she feels like she has to help all of them.

So, her portfolio, she has kept it completely essentially in fixed income and she refuses to tap into that money to live-off of--she's living off of just social security and a very, very small pension, because she's absolutely paranoid about running out of money and not being able to leave the children anything. Because she doesn't have anyone to talk to, bounce these ideas off of that she can trust, she won't, for example, upgrade and do some very basic things for the house, like in the kitchen, to make it more livable.

So I think many times the person is isolated and especially if they're in their retirement age or even further into retirement age, they feel frozen in terms of making investment decisions for themselves in this environment, because they are so concerned about running out.

So I think if someone can give them or if they can for themselves look at some numbers and get a bigger view of what that money will mean to them, they can improve their lifestyle and still leave monies for the children and some more other things that are important for them in their life.

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