risk tolerance: it’s complicated!
Consider some of the questions that an adviser could ask to guage your risk tolerance:
How long will you continue your SIP if the market goes nowhere at all?
How will you react to the leading pink paper saying “PPF has given better return than equity in a 10 year period”?
Did you know that in 1940 the US markets went down 20% over a 41 month period? Would you have stopped the SIP or even worse removed the accumulated corpus because of the fall? Jan 1973 to Dec 1974 was another terrible period when the market fell 44% over a 23 month period. What would have you done?
Personally I got cheated by a subsidiary of Shriram Transport Group which used to deal in equity shares. Since then I have not been able to buy that share. No not that I missed anything, but such bias impacts risk. Do you have any such bias that is impacting you?
Are you sure that you do not mind if your portfolio has companies that cause harm to the environment, spread cancer among people (Itc), cause obesity and infant illnesses (Nestle, Brazil), create farmer deaths (Monsanto, india)….? Some investors have an issue, many do not.
Suppose you bought RIL about 5 years ago and the share went nowhere and you sold it. And now in the last 5 months it has gone up 80% does this stop you from buying RIL NOW? If yes, your bias is impacting your risk and portfolio choice. New facts need to be met with new minds. ACTUALLY THIS IS REGRET, not risk taking capacity. We get confused between ‘enthusiasm’ and ‘risk taking ability’ and ‘regret’ with ‘risk taking ability’.
If we feel confident about our jobs we have more risk taking ability (correct feeling) but we also feel we have higher risk taking ability in a rising market (wrong feeling). The questionnaires do not make a distinction – rather cannot make a distinction.
The ‘risk’ perception is also at a later date. Remember when India wins the world up it is “we won the world cup” and when we lose it is “Virat kohli lost the cup”. Similarly the client who took the risk (knowingly or unknowingly) and made money says “I made money” when he loses he says “my broker sold this share to me – actually I was reluctant to buy”.
How confident are you to make the correct and appropriate financial decision?
This question will NEVER, EVER get a ‘not confident’ answer! If you see his financial history he would have got wrong portfolio allocation, a house full of endowment policies, poor timing – but the confidence does not drop! Confidence is greater than the track record!
All these questions are useful for the IFA to guage whether the market is in a boom time, whether the clients immediate success is making him more confident, whether the recent painful experience is making him more sullen, etc. HAVE TO BE JUDGED.
Risk of volatility is of course there but worse is our ability to use our money when we want it, to meet our GOALS!
Like I said about risk ‘its complicated’
Satish
HI Subra,
Do you provide advise on investing in MF and Stocks? If Yes, how do I approach you?
Regards,
Satish
Ramesh
Tagging a risk profile based on questions is illogical. It must be solely based demographics and what future holds for a person, whether he has other sources of income, whether he could generate income consistently, whether he solely depends on the corpus he has right now and whether it is a mix of such things.
Armed with such information, baseline asset allocation for a given period of time serves the purpose instead of banging head on illogical questions.
For a person soon to be retired, even a baseline 10-12% CAGR sounds somewhat risky, whereas the same is perfectly okay for a middle aged person who may have another 15-20 years of income generating years.
subra
No satish no longer.