Does risk tolerance change in bear markets?
By Gordon Powers, Sympatico / MSN Finance
Does risk tolerance change in the type of bear market we've been enduring? Geoff Davey, co-founder of FinaMetrica, a firm that designs psychometric-based risk tolerance questionnaires, doesn’t think so.
“Risk tolerance is a personality characteristic, generally unchangeable except in cases where the individual has experienced a major life event,” Davey said in a recent interview. “Risk tolerance is rooted in a person’s psyche, describing the place where one strikes the balance between getting a return and experiencing a loss.”
According to Davey, the risk tolerance questionnaires found on most investment company web sites are sadly lacking -- and he's not alone in that view.
“Many do not even test pure risk tolerance, let alone do so accurately,” Davey explains. “As a result, advisors themselves, however experienced in their field, do not necessarily have the skills to accurately measure a client’s tolerance for risk.”
In development trials he asked both clients and and a group of experienced advisors to estimate the clients’ risk tolerance prior to completing the quiz. The paying customers got it right whereas the advisors were all over the map.
“In one out of six cases, advisors had made gross errors of judgment. In fact, the advisors would have been more accurate if they had simply assumed that all clients had an average tolerance for risk,” he maintains.
One thing is clear in all this: What's happened in this bear market has come as a surprise to more people than it should have. Maybe next time will be different.
For a small fee, you can take FinaMetrica's deluxe questionnaire by clicking here. Alternatively, Rutgers University offers a free, 20-question survey online that covers much of the same material, although not in quite as much detail.
Posted by: philippe | May 4, 2021 9:47:12 PM
I do not believe in these risk tolerance categories. The investment sellers wants you to say you are risk tolerant so they can gamble your money... and not be accountable if they loose it...
A BMW dealer does not check if you are risk tolerant when they sell you a motorbike...
Risk-tolerance is in the packetging of financial 'services'... the fees is often 2 to 4% earn or loose... no-risk fees for the financial institutions.
You should also watchout historical data... they have a lot of funds and no clue... they use the one that happened to perform to market their service and there is no indication that it will also perform later...