Last spring, I interviewed a cross section of affluent Canadian about their investmnets. One of the questions I asked was what kind of investor they considered themselves to be. Almost without exception, investors defined their investment philosophy as some variant of "conservative" - from quite conservative and fairly conservative for the more venturesome to very conservative and extremely conservative for the truly risk averse. Clearly, the lessons of the tech debacle of the late 90's still resonate for many clients.

I then asked what being conservative meant to these investors - and here's where it got interesting. The most typical answer related to "not taking undue risks" (in some instances investors talked about avoiding risk entirely). One successful doctor's response was typical of many of the clients I spoke to: "I want to avoid anything too risky. I stay away from technology stocks and penny stocks and focus on safe blue chip stocks like the banks and Bell".

Almost certainly, many of these "conservative" investors have seen some unpleasant surprises since last summer. The problem is that being "conservative" has come to mean very different things to different people - at one extreme it can mean being invested in 100% Government bonds, at the other end of the spectrum it can mean having a 50 / 50 bond - stock allocation or owning large cap, defensive stocks.

One of the things that gets advisors in trouble is using language that means different things to us than it does to our clients.

In the ideal world, given its ambiguity and the trouble it leads to, we would eliminate the term "conservative" from client conversations entirely. In the real world, that's not possible. As a result, advisors need to invest the time to dig deep on what clients mean when they say that they are "conservative" investors. You need to help them clearly understand the true risk of their portfolios and the tradeoff in long term return that they're making if they try to avoid that risk. You have to get a sense of their true pain threshold and the decline in their portfolio which they can stomach before they start questioning their strategy and jumping ship.

One of the few positive aspects of the recent market turmoil it that it's become easier to get a reading on this. For many clients, talking about volatility in abstract terms is like warning a four year old not to touch the stove or they'll get burned - the moment you turn your back, the first thing they do is of course touch the stove. The only way to know what it's really like to be burned is to go through the experience.

As you talk to clients about their investment philosophy, spend the time to discuss what being a conservative investor really means to them and to dig deeper on the meaning of being a conservative investor. The investment of time and effort to get clarity on this will pay big dividends in fewer negative surprises for both you and your clients down the road.