Portfolios & risk
Conservative means something different to your client
The words on the allocation menu are doing far more work than they can support, and everyone assumes they mean the same thing by them.
Published
The gap
To a model, conservative describes a position on a spectrum of volatility relative to other options.
To many clients, conservative means the value does not go down. Not less, not more slowly. Does not.
Why this survives
Because the word is never examined. It appears on a menu, the client selects it, and both parties proceed believing they agreed on something.
The disagreement surfaces in the first decline, which is the worst available moment.
A client who chose conservative and lost money believes something went wrong. From their definition, it did.
The same applies to moderate
Which most people read as ordinary, or safe-but-sensible, rather than as a specific level of exposure.
What to replace the words with
Numbers about experience. This portfolio has historically declined by around this much in a bad period, and taken roughly this long to recover.
Drawdown communicates far better than standard deviation, because it describes the part people actually mind.
Ask the question in currency
If this account fell by this many dollars over six months, what would you do?
The answer to that question is worth more than the entire questionnaire, and it frequently contradicts the label the client selected ten minutes earlier.
Write down what you agreed
In the policy statement, in plain language, with a number attached.
Then the conversation in the decline is about a figure you both looked at, not about a word you both interpreted differently.