Over the past month, the S&P 500 index has dropped more than 150 points. At the same time, the S&P/Case-Shiller U.S. National Home Price Index hit its highest level since April 2008. Evidently, many investors are feeling skeptical about stocks and gung ho about real estate, an asset class that hasn’t exactly provided a safe haven over the last 10 years.

How to deal with a client whose risk tolerance is all over the map? Advisors generally administer some kind of questionnaire — often similar to a personality profile — meant to gauge how clients will react when an investment loses value. But in reality, experts say, risk tolerance is a moving target. Behavioral specialists and advisors recognize that clients’ inconsistent attitudes often stem from their backgrounds, perceptions and preferences. So it’s up to FAs, they say, to figure out what’s behind the apparently contradictory attitudes.

In periods when global stock markets get choppy, as they have been lately, clients may appear to have a higher risk tolerance for real estate because of the payment mechanism, suggests Barbara Shapiro. She runs HMS Financial, which manages $150 million in Dedham, Mass. Investors usually buy stocks or mutual-fund shares with a one-time cash outlay — often a hefty one — and thus are more inclined to fret over short-term fluctuations in value. But most people pay for a new home over years, if not decades, which can make property seem less expensive than it is. And homeowners tend to assume they’ll at least break even by the time they want to sell.

“People think about buying a house as a more long-term thing than they do equities,” Shapiro says. “You have to live someplace, and it’s going to cost you money either way. So they are less concerned about the risk in real estate than equities.” It’s up to the financial advisor to show clients that stocks, too, are investments for the long haul. Historical price charts can help.

Bill Beaudoin

Indeed, time horizon has everything to do with the way clients perceive risk, says Bill Beaudoin, vice president for risk management at Integrated Financial Partners. The Waltham, Mass., firm runs a network of advisors, accountants and attorneys advising clients on more than $5 billion. The longer investors have to achieve a goal, he points out, the lower their odds of permanent loss. So, regardless of market conditions, a client could be nervous about a real estate transaction but calm regarding portfolio performance, he argues.

“If someone wants to buy or sell a vacation home next year, that horizon is one year,” says Beaudoin. “When it comes to retirement, that goal may be 20 years away.” Advisors who see normally phlegmatic clients getting antsy may be able to save them from overpaying for a home or selling one at a loss just because of a perceived time crunch, he says.

Abiding the System

Clients’ past experiences and personal preferences can have a big influence on their willingness to invest in any individual asset class, warns consultant Tyler Nunnally of FinaMetrica. So his firm has developed a nuanced risk-profiling system designed to help advisors distinguish risk tolerance from other psychological dynamics. For example, someone with moderate risk tolerance might hate the idea of renting out a new vacation home for income if she once went through the ordeal of managing difficult tenants at a previous summer home. And someone with high risk tolerance could refuse to invest in oil companies for ethical reasons, Nunnally says. In both cases, the clients might not share their feelings with the advisor, who could wind up with an incomplete or confusing sense of their true risk tolerance.

Brian Schmehil of the Mather Group, which manages $530 million in Oakbrook Terrace, Ill., uses FinaMetrica’s profiling tool but complements its analysis with in-depth client conversations. The notion that a person might have a single tolerance level for losses in a wide variety of asset classes may be naïve, he suggests — and possibly counterproductive. “How a client views different situations does affect their financial plan,” he says. “It’s all about different types of risks and different types of reward, not necessarily different risk tolerances.”