Bonds - still so confusing...

dunstonh

Whereas IFAs will invest your funds based on a series of questions to determine your risk appetite, I can imagine a questionnaire for novice DIY investors which also has questions about their views on the economic outlook (with plenty of space for 'do not know' answers) and then suggests the sectors in which they should invest.

The risk profiler questionnaires are just the starting point. They provide the initial part of an audit trail and information. However, you tend to find that many people answer questions wrong or will amend the answers through further discussion. There are then further considerations given to behaviour, experience and capacity for loss.

its one thing to answer the questions that suggest you are willing to take a certain level of risk. It is another thing when that risk event happens and accepting it and another about being able to afford it.

aroominyork

coryls, I do not agree. People choose sectors all the time based on their slant of what they think is going to happen. The consensus rarely turns out to correct so I am wondering if there is a way for people to match their hunches - which inform everyone's investments who do not stick to index funds - into more accurately aligned instrument choices.

dunston, I wish it were so but my experience of IFAs suggests otherwise.

dunstonh

dunston, I wish it were so but my experience of IFAs suggests otherwise.

It can depend on the risk profiler used. Some, like finametrica are very advanced and build a lot of the behaviour, experience and capacity for loss into them. Others have a core set of questions and then the adviser is left to decide and document the behaviour, experience and capacity.

The one I use has the core set of questions and the free text sections with me to decide the outcome if I wish to vary the score. Most clients I deal with wouldnt know I was questioning them further in those areas as it is handled within the discussion rather than an obvious Q&A session.

Risk profiling is difficult. The questionnaire part could have different answers on different days depending on mood. How the question is positioned and understood can change outcomes. It is not an exact science yet it is treated as if it is. You have a bunch of wishy washy questions leading to a score which is probably wrong and you are looking to adjust it to what you think is right but in reality the difference between 40% equity, 50% or 60% is not really that great in terms of loss potential but more likely to give less back over the long term.

Then you have differences in opinion with those who may be checking the advice (audit trail file checkers, FOS, FCA etc). Some may factor timescale into it. Some have a difference of opinion of what is mainstream and what is specialist (one FOS decision last year felt that a portfolio of single sector funds weighted to a risk profile was too specialist and upheld the complaint using that reason - even though it wasnt the reason for the complaint. That investor was a company director with investment properties and the funds were your typical UK equity, Euro Equity etc).

Relying on the risk score outcome alone is lazy and against the FCA "guidance". I suspect the majority are doing it well nowadays but you will always get those who think the score is right 100% of the time.

Malthusian

aroominyork wrote: »

The consensus rarely turns out to correct so I am wondering if there is a way for people to match their hunches - which inform everyone's investments who do not stick to index funds - into more accurately aligned instrument choices.

Diversify across all suitable asset classes so that regardless of what economic events transpire, you are unlikely to lose money over the long term and have every chance of real capital growth above inflation.

People don't like losing money even when they lost money because you accurately aligned their investment choices with their thinkings about the economy. If someone wants to put all their money in cash because they think the crash will be this year or put all their money in the US because Trump will make America great again, it's the adviser's job to dissuade them.

coyrls

aroominyork wrote: »

People choose sectors all the time based on their slant of what they think is going to happen.

That may well be true but my argument is it's likely to be an unsuccessful strategy. As Malthusian says, an approach with more likelihood of success would be to:

Diversify across all suitable asset classes so that regardless of what economic events transpire, you are unlikely to lose money over the long term and have every chance of real capital growth above inflation