psychometric risk profiling questionnaire

Meeper

How would you like to assess someone's risk profile without the methods I and others have previously described?

BobQ

My main experience of Psychometic testing is in selecting people for employment roles. Here you can verify whether you are getting value fromn the tests by assessing those in a role that were selected by the test to see if they have the beaviours you were using the test to select. Its not so easy to do the same with a test used for assessing risk tolerence.

But as Dunstonh says the technique can inform an interview. The standard psychometic test approach of asking the same question in diffeent ways can expose issues that need to be resolved, so in the hands of a trained advisor it might be useful.

The Australian test referred to above seems (from its website) to focus its benefits on the test being reliable and repeatable rather than offerring the correct assesment. In fact it only claims to assess your risk tolerance against the rest of the population (which could be Australian or American). It takes a bigger leap to translate this into a discision as to how much of your assets you are willing to lose in order to make an above average gain.

I agree that from an IFA's viewpoint such a test helps in formulating the advice given (as Meeper says what else should they use?) but all of these tests need to be used very carefully because they do not give an abolsute view of an individual's risk tolerance.

gadgetmind

jem16 wrote: »

Agreed. Each asset has its own different kind of risk.

There are (at least) three kinds of risk.
1) Total loss.
2) Failure to meet/beat benchmark (RPI, FTSE100, or whatever.) over long term.
3) Volatility.

The first two are those that I work hardest to minimise, and the latter I accept as being a fact of life. Those who need a certain minimum sum on a fixed date can't afford to be this relaxed about volatility.

When answering these risk assessment questions, I find myself trying to map what they're asking to my view of which risks will affect my long-term wealth and which won't. It's not easy.

jem16

gadgetmind wrote: »

When answering these risk assessment questions, I find myself trying to map what they're asking to my view of which risks will affect my long-term wealth and which won't. It's not easy.

No it's not always easy. I usually try and go with my gut instinct answer rather than trying to over analyse the question.

gadgetmind

jem16 wrote: »

I usually try and go with my gut instinct answer rather than trying to over analyse the question.

While I've read quite a few of Damasio's books, I'm afraid that I've put considerable effort to trying to almost eliminate visceral influences from my personal, business, and investment decisions.

http://en.wikipedia.org/wiki/Somatic_markers_hypothesis

Yes, it's a complex argument, but I've chosen to plant my flag in the ratiocentric camp.

fairleads

gadgetmind wrote: »

There are (at least) three kinds of risk.
1) Total loss.
2) Failure to meet/beat benchmark (RPI, FTSE100, or whatever.) over long term.
3) Volatility.

The first two are those that I work hardest to minimise, and the latter I accept as being a fact of life. Those who need a certain minimum sum on a fixed date can't afford to be this relaxed about volatility.

But they can if they choose the asset that is appropriate for the given timespan. This is the basis of asset allocation, selecting the asset that gives the best chance of fulfilling the investors need in relation to investment term. If the investment is made with more regard to a persons attitude to risk than to their needs relative to both the current state of the market and the time frame then the asset allocation stands little chance of delivering their need. Further, i don't invest to beat an industry benchmark, i invest to provide a need.
Risk profiling people and asset classes and categorising them as low medium or high risk allows gives advisers the opportunity to 'sell ' a supposedly low risk asset such as bond/ gilt to a client with a low risk profile when at that particular time in the market cycle, bond/gilts investments could be higher risk than say emerging markets.

Gm the three risks you mention are not risks - just bogeymen

gadgetmind

fairleads wrote: »

But they can if they choose the asset that is appropriate for the given timespan.

We seem to be violently agreeing!

a supposedly low risk asset such as bond/ gilt to a client with a low risk profile when at that particular time in the market cycle, bond/gilts investments could be higher risk than say emerging markets.

However, you can manage the risk with gilts, which isn't the case with EM equities. As for market cycles, they don't exactly seem to be behaving as people predict, so you need to be prepared for pretty much anything.

Which asset class will do best in 2012? I'm hoping it's low p/e equities, sub-par preference shares, low-geared REITs, and infrastructure, but I'm holding lots of other stuff besides these.

GeorgeHowell

oldvicar wrote: »

I have just done a quick google and the first result I hit was http://www.scottishlife.co.uk/scotlife/Web/Site/Adviser/Investment/Tools/AdvInvRiskProfiler.asp
This was a much simpler questionnaire than the one I remember, but what stunned me was that the results felt so wrong for me. I can just imagine that if I went to a professional advisor he could use this, easily generate a glossy tailored report, and basically try to sell me a load of overpriced rubbish which would not suit me yet be complying with professional standards :eek:

It put me at the lower end of Moderately Cautious, whereas I believe I am on the cusp between Moderately Cautious and Cautious). So not too bad. What it lacks is the facility to bounce someone out with the message "You don't need an IFA" if their answers show that they have a modicum of financial knowledge and savvy themselves.

Derivative

On the subject of risk, a book I have recently read treats this subject fairly well I think:

http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Essentially, what we call "risk" is really just volatility year to year. Your risk tolerance should be less 'emotional' and more about the time-to-redeem.

gadgetmind

EdgEy wrote: »

Essentially, what we call "risk" is really just volatility year to year. Your risk tolerance should be less 'emotional' and more about the time-to-redeem.

Yes, spot on. I haven't (yet) read that book, but I have read books along the same lines by Bernstein, Graham and Hale.