Before we dive into the wealth management approach of the world’s leading private banks, it’s worth reflecting on the previous article, specifically its “philosophical” concept of knowing thyself. If you knew me, you would probably get the joke about the “philosophical” part; my kids do.
Personal Bias and Investor Suitability
It’s fair to say people don’t experience risk equally, reflecting personal bias. Some like to hike but find climbing too extreme; others prefer mountain biking, and even within MTB, risk appetite varies: some prefer friendly, well-defined trails, while others seek to discover their own downhill lines, not minding the technicality or associated risks.
Money works the same way. Some people rely on money markets; others prefer corporate bonds, while some are comfortable with riskier assets such as a stock exchange index or individual stocks, and so on. A key part of a private bank's fiduciary duty is assessing a client's willingness to take risks alongside their ability to absorb them; after all, risk tolerance is personal. I invite you to take a moment to think about your take on risk; it’s crucial- no right or wrong answers, just your preference.
Now, is it fair to say that more knowledge and experience in climbing or MTB will encourage people to step up their game if they want to? This translates to our personal investing proficiency: financial knowledge and experience. In the industry, it is known as investor competence or suitability.
I remember a friend of mine giving his kids money a few years ago so they could invest in the stock market. They were in their early teens, and their market knowledge was accordingly limited. They were focused and traded actively. Of course, nobody would be hurt if they lost all the money, but with my friend’s guidance and supervision, they developed market literacy. They continue to trade to this date.
My father’s understanding of financial markets was limited; he was a commercial director at a radio broadcaster. In September 1987, after repeatedly hearing that the Mexican Stock Exchange index was skyrocketing, he decided to invest some spare money in equities for the first time. Long story short, on Black Monday, October 19th, 1987, the global stock market crashed, including Mexico’s. Thankfully, it was spare money, but it was also the last time he invested in equities.
This is the classic behavioral cycle: recency bias (whatever the market is doing right now will continue to do), combined with the fear of missing out (FOMO), and after the crash, the “snakebite effect”: once bitten by a market crash, the investor becomes deeply terrified of the entire asset class.
Behavioral finance is a fascinating field, and we’ve only scratched the surface with recency bias, FOMO, and the snakebite effect. If you want to explore the concept further, there is plenty of material to dive into. If you do, you'll explore cognitive errors, emotional biases, and related topics.
Now, who do you think is more naturally inclined toward equity investing, my friend’s kids or my siblings? Ask yourself now: do you have personal or family stories that lean you toward one side or the other? Are you comfortable investing in financial markets? Do you understand the different asset classes? Are you familiar with, for instance, stock trading, stop-losses, and profit-taking? In other words, what’s your financial proficiency (knowledge and experience)?
While investor competence/suitability is governed by different regulations globally to protect people, make no mistake: your self-understanding, investment proficiency, and common sense will always be the safest first line of defense for you and your money.
Personal Circumstances
Knowing oneself is often more complex than “just” personal bias and proficiency; it has many layers. Personal circumstances, such as age, marital status, assets owned, having children, or other responsibilities, income stability, existing debt, and others, affect financial decisions and should be part of your considerations before investing. Here, one’s objective risk capacity (the financial bandwidth to absorb a loss) takes center stage, distinct from psychological risk willingness.
Some personal circumstances, like age and other factors, are what they are. Others can be modified and, more often than not, improved through personal effort to reinvent oneself, for example, a second job or side hustle. Better financial planning is essential to this process. It provides the right tools to see where you stand financially speaking and make better decisions; more to come in Part III of this series.
A 20-year-old with one million dollars will likely adopt a more aggressive investment strategy than an unemployed 60-year-old with no owned primary residence who has the same amount of money. Even if the 60-year-old owned a home and had passive income, their investment strategy would tend to be more conservative. Of course, a multimillionaire at 80 will have a completely different approach and goals, i.e., legacy.
This is one reason defined-contribution pension funds often offer target-date funds. For younger clients, these funds are heavily weighted toward equities and, in some cases, alternative assets. Portfolios for older clients, by contrast, rely less on equities and more on fixed income and liquid instruments to dampen volatility. Pension funds are considered long-term investors because their commitment to pay pensioners is decades away. For this reason, they can, to an extent, ignore short-term stock market noise and focus on generating growth that meets those future cash needs. For people closer to retirement, allocations adjust along a predefined “glide path,” gradually derisking the portfolio as retirement approaches.
No need to dig further into personal bias, proficiency, and circumstances right now; the point is made. Bottom line: Have a clear, objective understanding of yourself under these three aspects before making more financial decisions. I can’t overstate how important this is; it’s not a simple task to better understand ourselves, but it is the right first step toward improving your relationship with money.
Why is this important?
This matters because the risk-reward ladder of financial products is real, and navigating it without understanding your profile is like choosing between a road bike and a mountain bike without knowing the terrain ahead.
This is a quick snapshot of some financial products, and it’s just a thirty-thousand-foot view of them, but it will help you get an idea.
Lower risk: Cash and Treasuries with a capital preservation goal and high liquidity. The risk is losing purchasing power against inflation.
Moderate risk: Balanced Portfolios and Broad Market Index Funds (combining equities and investment-grade bonds) to balance growth and income; liquidity remains high. The challenge is market volatility.
High risk: Growth Stocks (stock picking) to pursue capital appreciation; liquidity remains high. The risk is exposure to individual company performance, which can undermine the invested principal.
Speculative risk: Crypto, derivatives, alternative investments, etc. The goal here is outsized gains; liquidity can deteriorate swiftly in some of these strategies. The main risks are principal loss and liquidity. Even in this category, illiquidity can be contractual by design (such as private equity or venture capital with capital lock-ups for 7 to 10 years) or structural, driven by violent price volatility in the underlying market.
Details aside, this outline shows that speculative returns could be more interesting. Still, the risk may be too much for someone who is risk-averse or has smaller savings that could be needed in an emergency, such as job loss or medical issues. The choices between these asset classes should be a reflection of your personal bias, financial proficiency, and circumstances, and as such a consequence of your financial planning, not driven by a willingness to take higher risks to see potential returns that may not come within your needed timeframe or may even result in losing capital.
I want to be clear: riskier investments from well-recognized financial firms that follow proper investment procedures, with strong corporate governance and due diligence, could be a good opportunity for some investors. Just keep in mind there is no “one size fits all.”
In Part III, we will examine the engine behind private wealth management: personal financial planning; bridging your personal cash flow into institutional tools; and mapping your financial commitments across short-, medium-, and long-term horizons.
In the following articles, we will cover how private banking methodologies can help you plan and allocate your investments, address personal biases, and improve investment strategies based on your financial plan. If I reach my goal at the end of this series, you will better understand financial planning and investments so you can make better decisions.
Always keep in mind: these writings aim to provide context on the basics of investments, not to provide specific investment advice.
Best,
