Welcome to the Weekly SUMmary - 05/14/2021
I recently sent a risk tolerance questionnaire to a client. What I didn't realize is that it was not interpreted well, so the results were completely inaccurate.
Let's take a look at some of the questions:
These things start off simple with Name, Date of Birth, Goals, How much do you have to invest, then it starts getting to the tough questions.
- First, it asks how you feel about the market?
- That's a loaded question. Are we talking about currently, or in general? Some people like investing. Some people prefer a savings account. Because markets can fluctuate and this questionnaire is not adjusting based on what is currently happening in the markets, my understanding of this question is are you interested in investing vs would you rather keep your money out of the market.
- How do you feel about your financial future?
- Another loaded question. If I'm trying to work on my finances, likely not terribly confident, but how many people are willing to admit that? Especially when someone else may be able to see the response.
- Then it gets into the numbers. What would you be willing to lose for the possibility for a greater gain?
- It is likely that the largest variable here will be age (whether you're in/near retirement and assets are the only income or currently still employed).
- What if the market dropped by...(some number hard to stomach), would you stay invested or sell everything?
- This is typically also going to vary depending on age.
- Lastly it asks if you would choose a certain amount of gain with a possibility of loss over a guarantee of low rate of return.
- Personally, I hate the question here. Typically the gains and losses are extraordinary and the guarantee is miniscule.
- Although I'd prefer this put a different way or using different numbers, I understand why it is there. Some cannot accept the risk that the markets have.
This last bullet is illustrated well in times of volatility (see former blog here), such as what is currently happening in the markets. There are many reasons the markets are volatile. The primary reason is that everyone is looking for the next winner. These large financial institutions are constantly looking for what will "win" for their clients, just as retail investors trading in their brokerage accounts through their phones or computers. The institutions typically have more information, or should at least be analyzing it more than the average person, but they are doing the same thing... Looking for the next winner.
Ultimately, the point of these questionnaires is not to guarantee anything. The purpose is to have a better understanding of what risk is acceptable to a person.
If you're interested in seeing what a tool like this says about your risk tolerance, feel free to click the link below.
What I will say is, although these tools are great, nothing beats a conversation.
Thanks for reading.
DoSUMthing smart with your money.
As always, this blog is for educational purposes only and should not be construed as advice or recommendation. One should always consult with a professional before making financial changes.